Biggest threat to your estate could be those closest to you (CNBC article)

June 15, 2018 - Posted by: admin - In category:

taxes - No Responses

Family conflicts could be the biggest problem with your estate plan.  Contrary to popular belief, this is more likely if you fall into the less-than-wealthy category.  Fewer assets to go around often results in more strife among heirs.

Tax considerations (estate tax mostly) have traditionally dominated the focus of estate planning.  Today, with the current estate tax exemption set at $11.8 million per person[1], capital gains taxes are more relevant for the average American.  And while such tax issues can be significant and worth careful attention, the threat of conflict between heirs is something that is most often overlooked by individuals and professionals during the estate planning process.  The result is that in far too many instances, squabbling over estate administration and ultimate distribution eats away huge portions of remaining assets. 

A article published June 14, 2018, discusses many of these same points.  Click here to access that article, written by Darla Mercado.  Below are a few quotes from the article:

This threat could devour thousands of dollars from your estate

Conventional planning techniques may cover you from a tax perspective, but they do little to address family strife.

If your estate plan only saves your family from a hefty tax bill, then — surprise — it’s still not doing enough.

“Family meetings are best for clients with fewer assets…They’re the ones who are the most litigious and will spend most of the inheritance on lawyers.”

What is the solution?  First and foremost, clients, attorneys, accountants, financial advisors and others need to collectively be much more cognizant of the personalities, strengths, weaknesses and related dynamics that will be present when the parent(s) are no longer around.  Consider the common example of children who are left unsupervised at home when parents leave.  The behavior or such unsupervised children tends to be very different from the behavior of the same children while their parents are at home.  Believe it or not, we often observe a similar contrast in behavior by adult children after one or more parents have died.  The point here is that a parent should not assume one or more children will act in the same manner after their passing.  While this may seem obvious to some, such faulty assumptions and misplaced trust are all too common.

As mentioned in a prior post, below are a few other suggestions to anticipate and hopefully avoid future family drama:

Protect against the worst-case scenario

Use various checks and balances 

Utlize detailed instructions

Involve someone who is neutral, such as as trust advisor

The CNBC article noted above recommends finding “a lawyer or an accountant acting as a fiduciary” to serve in such neutral third party role–presumably in the capacity as trust protector or trust advisor.  I could not agree more.  A bank or other corporate trustee is another option.  However, because of the significant expenses associated with having a full-time professional trustee, this is often not a realistic option for the average family.  What is the difference between a trust advisor and a professional trustee? Great question. The difference is that a trust advisor (in the form of an accountant, attorney or financial advisor) is a neutral third party who is there to assist the trustee, as needed.  On the other hand, the corporate trustee is “on the clock” at all times and takes the place of the family member or another individual to act on behalf of the trust in all matters.

It is my experience that many of the benefits achieved by having a corporate trustee, if not most benefits, can be obtained by using a standby trust advisor and the trust advisor option is usually much more economical.  It is somewhat akin to having a full-time security officer (i.e., the corporate trustee) vs. being able to call 911 and get assistance from the police in the event of an emergency.  Not a perfect analogy, but you get the point.

The checks and balances concept noted above references the manner in which the Constitution divides power among the various branches of government and provides mechanisms for each to be checked and limited by the others.  While your trust agreement can and should be more simple than the Constitution (after all, the Founding Fathers aren’t available to write your trust agreement), the wisdom of James Madison and his founding brothers can be borrowed in the design and implementation of your estate plan.  For example, instead of giving all trustee powers to one person, without limits, you can give some trustee duties to one individual (or group) and then provide that other persons are responsible to handle other matters.  There are several other methods and examples of incorporating checks and balances into your estate plan in a manner that is wise and protective of all involved.

[1] This amount can be combined by a married couple via portability.