1. Listen to Clients’ Needs
The client is the one best suited to design the parameters of the estate plan — the planner should merely be a facilitator. Many clients come into the estate-planning process without a clear idea of what they want to accomplish or indeed what’s even possible.
I believe that the job of the purposeful planner is first to listen, watch the client’s body language and ask open-ended questions to guide the client toward solving his own estate-planning problem. Too many practitioners begin talking way too soon before doing sufficient questioning, listening and watching. Listening to the client’s needs isn’t easy, particularly when the client is cost-conscious and puts the practitioner into the pressure-packed “expert category,” which can be a conundrum and a trap. Every client is different; some clients know exactly what they want to do and can get right down to it, while others are unsure and meander. The purposeful estate planner needs to figure out where the client is in the estate-planning mental process and meet him there.
2. Give Clients Control
The client must be in control of the planning process. Clients fear the estate-planning process for a variety of reasons. Death anxiety, loss of control and simple fear of the unknown are but a few of the concerns that can cause procrastination and failure to go forward. Death anxiety (mortality salience) is one of the obvious fears of estate planning.
The purposeful estate planner will do everything possible to put and keep the client in control over his estate-planning process. I maintain that clients who are in complete control of their estate-planning processes go forward and conclude the work at a much higher success rate than those who let the practitioner control the process.
3. Mirror the Client’s Goals
An estate plan must mirror the client’s desires, goals and values — not those of the advisor. Too often, the practitioner is overly paternalistic and makes lots of decisions concerning the client’s estate plan, often buried in the so-called boilerplate, which express the practitioner’s desires, goals and values instead of the client’s. Clients whose estate plans reflect their personal desires, goals and values are much more likely to have bought into the plan, are far more likely to sign documents implementing the plan and are usually happier and more confident about their estate plan.
4. Consider Psychological Implications
The client’s legacy impacts far more than the client’s property. Estate planning can have psychological implications for the receivers or perceived receivers and can adversely affect the relationships of those who survive after the client’s death. It’s imperative that the purposeful estate planner makes it crystal clear to each client that what the client does in the estate plan can have a lifelong effect on others.
5. Get Feedback From Beneficiaries
Family communication before death is essential to an effective estate plan. One of the most common causes of miscommunication and estate and trust litigation is a client’s failure to discuss his estate plans with potential beneficiaries. When heirs aren’t given any explanation for an estate result that doesn’t meet their expectations, they often default to hurt and anger, as they blame individuals who came out better and come back swinging with a vengeance in court. Often, there’s a simple explanation that, had the client articulated it, either during lifetime or at death, would have cut off post-death litigation or hard feelings. One explanation could save thousands in legal fees and eliminate or substantially reduce angst and hard feelings.
6. Beware of the Hidden Enemies
The hidden enemies of an estate plan are the “lack offs:” liquidity, coordination, communication and diversification. Any of these deficiencies can spell doom for a plan or cause it to underperform. Too often, particularly in this post-probate world, estate planning is done in bits and pieces through execution of deeds, beneficiary designation forms and pay-on-death account forms. The client whose estate principally consists of one asset, for example, a family business interest, isn’t diversified and faces the risk of a wealth setback if the business flounders for whatever reason, even one that’s out of the client’s control.
7. Be Flexible
An estate plan must be flexible and anticipate reasonable contingencies. The principal problem with most estate plans is that they’re fixed in time and based on a finite, fixed set of assumptions. People can die suddenly, become incapacitated or fall prey to alcoholism or drug abuse. Financial fortunes can wax and wane. People marry and get divorced and marry again. Relationships are formed while others fall apart.
The purposeful estate planner will anticipate and address reasonably foreseeable events and build in safeguards should any of those events occur. For example, when selecting trustees for a trust that’s expected to last for a long time, the purposeful estate planner will not only provide for successor trustees, but also will include a method for selecting additional successor trustees when the named successors can or will no longer serve.
8. Refrain From Absolutisms
There’s no one absolutely correct way to address any particular planning issue. Practitioners who fail to adhere to this principle fall prey to psychologist Abraham Maslow’s admonition that the person who only has a hammer begins to think that every problem is a nail. Every client’s situation is unique. Indeed, what may usually be lousy advice for most may fit a particular client’s situation perfectly. The purposeful estate planner will remain nimble and open-minded about all possibilities for solving a client’s problem.
9. Don’t Assume Order of Death
An estate plan must work irrespective of death order. One of the immutable truths of life is that individuals sometimes die out of actuarially expected order. The estate plan that hinges on, for example, a senior generation member predeceasing those in younger generations often is a house of cards that comes crashing down when a member of the junior generation dies first. The same is true in the estate plan that assumes that a healthy spouse will survive a not-so-healthy spouse. This problem is often seen in buy-sell agreements between those of different generations. The purposeful estate planner will draft an estate plan that still functions if deaths occur out of expected order.
10. Provide Checks and Balances
An estate plan should provide a system of checks and balances on power and authority. Estate planning necessarily involves a passing of the torch of leadership and control. As Lord Acton observed long ago, power tends to corrupt, and absolute power corrupts absolutely. Power shifts can expose people and leave them vulnerable to oppression, even to being terminated in employment or as a beneficiary for reasons of simple spite. The purposeful estate planner will build in a series of checks and balances that simultaneously allow exercise of authority and provide protection to those who are subject to that authority, which can be in the form of veto powers, powers to remove and replace trustees, co-sale or tag along rights, accounting rights or similar types of protections.
11. Anticipate Post-Death Problems
If you foresee a challenge to the estate plan, discuss building a reasonably negotiated “out” for the potential contestant with your client. Otherwise, the only out is the courthouse. Wealthy individuals usually find that they have no peers down at the courthouse. The purposeful estate planner will plan in advance for realistically possible post-death problems and estate plan challenges. Sometimes, the fix is as simple as a modification of the spendthrift clause to permit voluntary purchases and sales of beneficial interests so that the interests of beneficiaries who can’t get along in the same trust can be separated, which occurs frequently when step-relations are lumped together in the same trust.
Sometimes, if a challenge or other problem is anticipated, the estate plan can be confected to penalize the challenger or reduce the value of winning a challenge. For example, the estate plan might contain an in terrorem clause in which the challenger forfeits his inheritance by challenging the estate plan or can even be configured in such a way as to force the challenger to sue his own children (when a generation is skipped, usually to the chagrin of the members of the skipped generation) or even a respected charity to receive anything from the estate.
12. Prepare for Post-Death Contingencies
Estate planning is a process that doesn’t cease until at least nine months after the client dies. A prudent estate plan will provide for post-death contingencies. Too many clients and their advisors view estate planning as an event that ends when the will or trust is signed or the life insurance is purchased. The purposeful estate planner views planning as a process on several levels that continues throughout the client’s lifetime. Because life always changes, it’s imperative to review an estate plan periodically and modify it to address material changes in circumstances. I’ve urged clients to pull out their estate-planning documents and read them once a year, either when going onto or coming off of daylight saving time.
13. Coordinate Efforts Among Advisors
Communication problems among estate-planning advisors arise in one of two principal ways:
1. The client tells each advisor what he feels that advisor needs to know and no more, so that the client retains some false sense of control over the situation. Communication among advisors can surmount this problem. I require complete access to all of the client’s advisors in my engagement letter.
2. The advisors fail to properly communicate among themselves. Sometimes this happens because of fear that the other advisors will encroach on the advisor’s “turf,” which causes that advisor to withhold information. Sometimes these communication problems are caused by a power struggle among the advisors to be the client’s “most trusted advisor.” Still other times, the problem is that the advisors don’t trust, respect or like each other.
14. Beware of Misrepresentation of Facts
Clients hold back some facts for various reasons. The client may feel vulnerable and want to maintain control by holding onto key facts. Sometimes, clients are embarrassed by what isn’t revealed or they may be hiding something from a spouse or family.
Very few estate planners do much due diligence aside from incorporating the answers from a client’s fact finder, assuming those answers to be complete and truthful. The purposeful estate planner will maintain a healthy skepticism about the client’s representation of the facts, paying particularly close attention to what isn’t said or when things just don’t add up.
15. Apply Risk Management Principles
Client families face different types of risks. Advise the client to take active steps to reduce or eliminate these risks. Estate planning has come full circle, from a time when there were ethical issues inherent in even discussing asset protection with clients to a time when failure to address it may well constitute malpractice. The purposeful estate planner should discuss appropriate asset protection techniques ranging from asset segregation in entities to proper property and casualty insurance, as well as umbrella insurance to self-settled asset protection trusts.
16. Asset Values, Cash Flow and Income
Significantly analyze asset values, cash flow and income before any gifting is done. Many estate planners focus too much on asset values and prospects for appreciation in the gifting calculus, and they don’t spend enough time analyzing the cash flow aspects of a proposed gift. If the planner doesn’t sufficiently consider cash flow aspects, the client could be left exposed after having made a large irrevocable gift. For example, a client who’s still working in a family business and living off of the salary of that business may be best advised not to gift significant interests in the business entity because the loss of control could imperil his livelihood.
17. No Need to Force Lifetime Gifts
It’s okay not to want to gift property. Many practitioners are mesmerized by the tax and estate-planning benefits of inter vivos (lifetime) gifts. Some pressure clients to make gifts to achieve these so-called “benefits” under the guise that gifting is something that they can’t afford not to do. Practitioners like these neglect to consider the loss of access to the capital that the gifted asset represents. It’s the nature of human beings to gather and accumulate possessions. What isn’t so natural is to part with significant assets during one’s lifetime because of the real fear of running out of money or living too long. The purposeful estate planner recognizes this difficulty and allows the client to become totally comfortable with irrevocably parting with significant assets before allowing the client to do so.
18. Don’t Assume It’s Too Late
It’s rarely too late to do some planning. While it’s true that some estate-planning techniques are risky at the end of life expectancy or after the client becomes terminally ill, there are many things that can be done to assist the effectiveness of a client’s estate plan even at the end of the client’s lifetime. For example, asset holdings can be rearranged to qualify the client’s estate for tax benefits, such as paying the estate tax in installments. It’s appropriate to revisit beneficiary designations and the estate-planning dispositive documents close to the time of death to see, for example, whether POAs should be exercised.
19. Don’t Ignore Boilerplate
Boilerplate is more important than you think. Practitioners make very important decisions that are buried in the boilerplate of documents. The purposeful estate planner will carefully review, with a fresh mind, his boilerplate for every client to ascertain what items to discuss so that the estate plan more carefully mirrors the goals and desires of the particular client.
20. Don’t Force Equal Treatment
Fair isn’t always equal. Equal isn’t always fair. Many clients slavishly adhere to the principle of treating children equally. Often, it’s the children who remind and pressure clients about this; I call this the “what about me?” syndrome. The purposeful estate planner will point out to clients that leaving estates equally to children isn’t always a fair result, particularly if one child is needier than other children or when the client helped one child far more during their lifetime than the other children.
21. Build on Bridges of Trust
In my experience, the best plans involve an element of intergenerational trust in passing on the torch of leadership. How does one engender that trust? It’s simple to articulate, but is sometimes difficult to put into practice. At some level, it involves a surrender of some control by the senior generation. But, it also requires the younger generation to be circumspect, respectful and magnanimous about the use of that received power and control. Building safeguards into the estate plan in the form of checks and balances on authority can assist greatly in the building of this bridge of trust.
22. Carefully Select Fiduciaries
The best laid estate plans can be torn asunder if the wrong people are put in charge. The purposeful estate planner should caution clients not to pick fiduciaries who’ll have an inherent conflict of interest without instituting adequate safeguards. Selection of fiduciaries also can inform what powers are given to each fiduciary. And, there may be express limitations on the exercise of certain rights and powers by certain fiduciaries to prevent possible abuse.
23. Avoid Restrictive Trusts
Trusts are management vehicles — they shouldn’t be more restrictive than necessary. All other things being equal, all assets should be held in trust. Because life can turn so quickly and be unpredictable, I recommend that all assets be held in trust absent a compelling reason to do otherwise. However, the trust instruments themselves should give flexibility to the trustee to react to changing circumstances, particularly if something bad happens to the client. And, beneficiaries can and should serve as co-trustees in most situations in which they’re competent and able to do so.
24. Consider Special Situations
Some situations warrant special attention, for example, when less than all of the client’s children work in the family business; when the client contemplates separating the building from the family business by bequest or sale; and in all subsequent marriage situations, especially if either spouse has children from a prior marriage or relationship — even if relationships now are good. These enumerated situations require special attention because of their inherent complexity. For example, in a subsequent marriage situation in which the client has children who aren’t the children of the client’s current spouse or partner, the estate plan should protect all sides after the client’s death, which is when superficially good relationships often break down.
25. Provide for Sufficient Liquidity
Estate-planning documents don’t pay taxes or debts — dollars do. An estate plan must provide for sufficient liquidity to pay taxes and expenses at each death. Illiquidity is an enemy of the estate plan unless it’s carefully planned out in advance. Too often, second-to-die life insurance is used as the liquidity vehicle, but this ignores the taxes, debts and expenses that either could be paid or that are due or otherwise payable at the first death. Liquidity is an advantage, not a hindrance, for a properly crafted estate plan.
26. Don’t Focus on Tax Considerations
The tax issue is the easiest piece of the puzzle to solve in estate planning, which is why many estate planners want to stop there: It’s the path of least resistance. The sad fact is that delving into the non-tax aspects of an estate plan often falls out of the bailiwick and comfort zone of some advisors and can get sticky.
The purposeful estate planner will assist the client in crafting a plan that meets with the client’s goals and values, even if it costs some tax at death. As long as the client is aware of and signs off on it, the estate planner should feel comfortable with proceeding in that fashion. The bottom line is that the estate plan should reflect the client’s desires, goals and values.
27. Don’t Always Defer Estate Tax
It sometimes makes little sense to defer the estate tax. Taking this action was more important when the estate tax applicable exclusion amounts were much lower and the rates were still graduated, because it often cost more in overall estate tax to defer the estate tax through the marital deduction, when all that transfer would do is push the surviving spouse into a higher estate tax bracket; the Internal Revenue Service came out better if the estate of the first spouse to die elected to defer the tax through the marital deduction. Even in this time of high applicable exclusion amounts, only one effective rate and portability, it’s important in my judgment not to knee-jerk defer the federal estate tax in every situation.
28. Don’t Ignore Income Tax
They’re often more important than estate tax considerations. With the higher applicable exclusion amounts and talk in the air of outright repeal of the estate tax, thankfully, most advisors have started focusing attention on the income tax ramifications of the estate plan because very few clients have to worry about the federal estate tax. But, the income tax aspects of estate planning have always been very important. For example, if the client is charitably inclined and has an individual retirement account or qualified plan, the client should strongly consider satisfying the charitable portion out of the IRA or qualified plan pre-tax assets with post-tax assets because the charitable recipient is exempt from income tax while family members aren’t. The differences in the adjusted basis rules for inter vivos versus testamentary transfers can make a huge difference in the after-tax proceeds of a sale of an asset.
29. Require Charitable Intent
Charitable estate-planning tools require charitable intent — these tools rarely provide a better economic result than making no charitable gift at all. Very few things can get a practitioner in more hot water than trying to shoehorn a non-charitably inclined client into a charitable technique under the guise that it produces a better economic result. In these situations, often all you end up with is an unhappy client. There’s no substitute for true charitable intent on the front end. Estate planners have been successfully sued for this mistake. Don’t make this error. Steer non-charitably and even marginally charitably inclined clients away from charitable techniques.
30. Get Complete Appraisals
Gifting (or selling to family) without complete appraisals by qualified appraisers invites tax disaster. I realize that clients hate to pay appraisers and often only begrudgingly do so because you told them that they had to, but the purposeful estate planner will be firm about this necessity. In tax valuations, actual value is irrelevant because it’s the tax return value that’s important, and that value may have no relation to true value. Actual value is unknown because there usually hasn’t been an arm’s-length sale at fair market value, and perceived, defensible value is everything. Only a comprehensive appraisal performed by a qualified, independent appraiser can protect the client from the vagaries and sometimes arbitrary and capricious valuations of the IRS, as well as the associated expenses and risk of having to defend value.
31. Consider The Total Situation
An estate plan must consider the client’s total situation — personal and business relationships, values, health care, management, property disposition, liability exposure, liquidity and cash flow needs and taxes. Too often, practitioners just want to deal with a limited aspect of the client, usually the property and the taxes, but this does the client and the practitioners a grave disservice. The true practitioner will see the client as a complete person, who’s comprised of many related parts, and will address all of those parts. In today’s extraordinarily litigious world, it’s imperative that the practitioner review the client’s assets and lifestyle for liability exposure and consider ways either to eliminate or reduce that exposure.