The most common reasons given for estate planning usually include: avoiding probate, address taxes, providing for spouse and family and preserving family businesses. However, other less-discussed subjects often serve as substantial planning motivators for our clients, but aren’t found on client planning questionnaires, and are frequently absent from the planning discussions and documents.
Incentivizing Family Behaviors
As children develop, they learn that certain behaviors are rewarded, for example, getting good grades or completing chores. When they move into the working world, this message is reinforced—they work, they get paid; they work hard, they get promoted and paid more. There are estate-planning approaches that use similar principles. Wills and trusts have long been used to provide incentives to promote success and reinforce values. Incentive provisions can be used to encourage education, start or advance in a business, live a healthy lifestyle, promote philanthropy or do whatever is important to the client.
If a will is used to incentivize desired behaviors, a purpose or intent statement should be included. Wills are, however, static documents and terminate on the distribution of assets. Trusts, on the other hand, remain viable over time and, for that reason, lend themselves to impacting beneficiary behaviors into the future. An incentive trust should contain well-defined objectives and appropriate benchmarks, which may be as creative as the client and the advisor determine. However, it’s important to remember to shoot for all carrot and no stick, lest the incentive become an albatross.
Our job as advisors is to keep the client’s goals realistic, clear, concise and understandable. The key to successful incentive trust use is to induce, not judge. We all learned the childhood proverb, “you catch more flies with honey than with vinegar.”
Heirs With Substance Addictions
Substance abuse within a family has its own host of estate-planning considerations. The first hurdle is getting the client to identify the problem. Often, substance abuse is thought of as a family matter, to be kept private and hidden. This is an area in which advisors, can be exceptionally helpful, by raising the topic first and assuring the client that she can protect and provide for the afflicted family member (often a child) with proper planning.
A trust can provide for the child during the client’s life, through incapacity and after death. It should grant the trustee discretionary power to pay the child’s living expenses including: medical bills, rehabilitation costs, tuition, housing expenses and grocery bills. The trust should also authorize the trustee to request guardianship or conservatorship from the court, if necessary. Clearly, the trust shouldn’t allow outright gifts or mandatory distributions. It should also identify funding sources for the child’s care and protection, particularly after the client’s death.
The trust may also offer incentives to the beneficiary to reward positive steps. These incentives could take the form of additional distributions based on established benchmarks, like holding a full-time job or attending counseling. Because individuals suffering from substance addiction are often vulnerable and easily influenced, the trust should contain a spendthrift clause, preventing creditors or others from accessing the trust assets. Finally, familiarity with the family is necessary for the trustee. During life, the client can write an annual assessment summarizing the child’s condition. The client can share these statements with the trustee each year and keep them with the trust document to assist the trustee in effective trust administration in the future.
Protecting From “Family Raiders”
It’s not uncommon for family members or acquaintances to enter the home or business of the recently deceased and help themselves to estate assets. This activity has many names: “U-Haul planning,” “scoundrel planning” or “inheritance hijacking.” Although this action is a crime, it happens out of public view and is often regarded as a private family matter. Because no one wants to air dirty laundry in public, these crimes are rarely prosecuted, and the assets are very difficult to recover. Plus, the intended recipient may never know the theft has occurred. The justifications offered for these thefts include such classics as, “Mom liked me the most;” “Dad and I had a falling out—I need to get what I am due;” “I was the closest to Auntie before she died;” and “They owe it to me.”
Problems often arise when the client is secretive about assets and intentions. The client can take a number of steps to make the process more transparent and avoid inheritance hijacking:
- Inventory assets (lists, pictures, videos) and send copies to the lawyer, executor and trustee
- Inform the beneficiaries of what they’ll inherit and have each one sign a letter of understanding
- Give a copy of the inventory list and estate-planning documents to a minimum of one heir (someone other than the executor or trustee)
These actions are particularly important when there’s a caretaker, new love interest, club or church acquaintance or others who frequented the client’s home or business prior to death.
Moving to a New State or Country
More than 7 million Americans relocate to a new state each year. Very few ask their advisors for guidance prior to the move. Even a move to the next state may cause disruption or invalidation of a carefully crafted estate plan. The most common cause of problems in an interstate move is going to or from a community property state. In the nine community property states, all assets acquired during marriage are generally considered jointly owned by spouses regardless of how the assets are titled. In common law states, the individual owns the assets that are titled in her name. These titling differences alone will clearly impact existing documents in the event of a move.
Some jurisdictions restrict who can serve as executor or impose greater requirements on non-resident executors. Each jurisdiction also has its own medical directive forms, based on the individual jurisdiction’s statute. The new state may have different document signature requirements, different estate and inheritance laws, and different spousal inheritance rules. Even when the planning documents remain valid, the new jurisdiction may interpret terminology differently.
Clients are more likely to contact advisors when preparing to move to another country. Prior to the move, the client and advisor should discuss the impact of the new country’s estate distribution laws. A number of countries have “forced heirship” laws that distribute a portion of assets to the children on death. Many countries have legal systems that don’t recognize trusts. It’s important to review the existing estate plan and make changes before the move.
U.S. citizens are subject to U.S. income and estate taxes on their assets, regardless of where in the world assets are located. Although the United States has tax treaties with many other countries that prevent double taxation, there are a number of countries with no U.S. tax treaties, and it’s important to know the rules in those countries in advance. A simple solution to many of these planning problems, if practical, is for the client to retain a U.S. domicile and simply change residence.
Recurring themes exist across all of these planning topics that are important for the client’s well-being. Using specific trust language, promoting good communication and organization, and understanding and explaining the role of life insurance, are all important in successful planning. However, to provide the very best service to our clients, we need to go beyond the client questionnaire and revisit the language in our form documents. Ultimately, the magnitude of our value as advisors comes from delving beneath the surface, listening carefully and asking the right questions.
This is an adapted and abbreviated version of the author’s original article in the February issue of Trusts & Estates.