* This article was originally published in Wealth Management. To read the full article, click here.
All good wealth management includes estate planning as a component. Changes in the tax laws, modern trust conventions and family changes make periodic reviews of estate plans a real necessity. While the contemplation of your eventual demise is never at the top of anyone’s list, there is satisfaction from the feeling that you have taken care of issues and provided for those you love. But unwitting mistakes can wreck your careful planning and even lead to family fighting and estrangement of the very people you hope to benefit.
The suggestions listed below are designed to maximize the likelihood that your estate plan will not only benefit your heirs but keep them talking to each other after you are gone.
- Don’t Keep Your Estate Plan a Secret: While there is no need to involve your family in planning how your estate will be distributed, there is great utility in telling them exactly what they can expect before you pass away. It allows them to ask questions, understand your reasoning and avoids unpleasant surprises. Sharing your plan may cause animosity now, but you can address it and make appropriate changes, if needed. Your estate plan should include a mechanism for dividing family heirlooms, which can carry a bigger emotional component than cash.
- Treat Your Children Equally, Even When There Has Been a Falling Out: People tend to see inheritance as the ultimate litmus test. Or as the singer Jewel aptly crooned “you know you love him if you put him in your will.” If you disinherit one of your children, you can expect that he or she may sue, causing the estate to incur costs and attorneys’ fees that will decrease the size of the estate for all beneficiaries. If there is good reason for treating your children unequally (such as where one child needs more than the others because of physical or mental limitations), consider making gifts to that child during lifetime rather than making unequal distributions under your will, or establish a trust that will provide for the child.
- Consider Using Modern Inclusive Definitions of Issue/Descendants in Your Documents:Wills traditionally use the words “issue” and “descendents” to identify who inherits. But depending on legal precedent in your state, the definitions of ”issue” and “descendent” may not cover modern concepts of children, including those conceived by modern methods of in-vitro fertilization, or a surrogate mother, adopted children, the non-biological children of gay couples, and the biological children of unmarried couples. Because the methods of procreation that may be utilized by your offspring in the future won’t be known, you should consider using an expanded definition of “issue” and “descendant” in your estate planning documents to encompass modern methods of conception. You may also want to consider drawing the line for children who are adopted after a certain age, such as 21. Adoptions of paramours have been used as a way to ensure that they inherit.
- Avoid Conflicts of Interest When Selecting Executors/Trustees: The attorney who drafts your will or your trust instrument may have a conflict of interest if he or she serves as your executor or trustee, especially if he or she is also serving as a fiduciary for other family members who are also beneficiaries. Similarly, a business partner serving as a trustee may have conflict of interest. Consider the appointment of co-executors and co-trustees, who can act as a check and balance. Also consider the appointment of a corporate trustee along with an individual whose judgment you have reason to believe will be respected by the beneficiaries.
- Don’t Hamstring Your Trustees But Ensure Accountability: When creating a trust, the instrument should not try to dictate the timing and purpose of every distribution but provide general guidelines of what is acceptable. Choose the right trustees and give them broad discretion and authority. Consider giving your trustees the authority to terminate the trust under circumstances that you set forth in the instrument. Consider whether to include specific provisions as to how the trustees will be paid, i.e. by statutory formula as applicable in some states, by hourly rates, or otherwise.
- Consider Trust Protectors for Irrevocable Trusts: A trust protector is a fiduciary, separate from the trustee, whose role is to ensure that the trust’s purposes are being satisfied. Toward that end, he/she can be given the power to remove and replace a trustee, to amend trust agreement if the terms no longer carry out the grantor’s intent or to achieve tax objectives, and to change the situs of the trust. Consider designating a trust protector for longer term trusts, such as trusts that may continue for more than one generation. If you choose to use a trust protector, the role of the trust protector and his/her powers should be carefully spelled out in the trust instrument.
- Trust Beneficiaries Should Not Be Left in the Dark: Notwithstanding a grantor’s wishes, all beneficiaries are entitled to a copy of the trust agreement as a matter of law. Consider spelling out in the trust instrument the frequency of the trustee’s reporting to current income beneficiaries and what information they are entitled to receive from the trustee. Also, keep in mind that in most jurisdictions, remainder beneficiaries are entitled to be kept reasonably informed about the administration of the trust and of the material facts necessary to protect their interests.
- Edit Your Estate Plan Along the Way: Your circumstances and those of your family members will change over time. Changes in federal and state tax laws may necessitate changes to your estate plan. Schedule annual meetings with your attorney and financial advisor to review your plan and ensure that it is both current and complete. The cost of keeping your estate plan current will be miniscule compared with the potential estate tax savings.
- Consider Possible Changes in Family Circumstances: “Shirtsleeves to shirtsleeves in 3 generations” is a common occurrence. When making bequests, consider which family members will be able to maintain a real estate asset, including taxes, in future generations, and build in mechanisms, such a trust, to enable them to do so. Also consider a dispute resolution mechanism that will govern decision making about selling the asset if it is no longer wanted by your heirs or they can no longer maintain it.
- Dispute Resolution Mechanisms: Nip disputes in the bud by having candid up-front discussions with your family. Litigation is likely to be expensive, and may expose family matters in a public forum. Consider alternative dispute resolution methods, including mediation, to resolve disagreements among family members, keeping in mind that minor, incapacitated, unborn and unascertained beneficiaries must be appropriately represented by their own counsel. Even if a will or trust instrument does not contain mediation provisions (and most do not), family members may voluntarily agree to mediation as a way to avoid litigation in certain situations.