All Nerd's Eye View Articles On Estate Planning Strategies

Recommending A Corporate Trustee: Finding One Who Will Serve The Client’s Interests (Without Competing For Client Relationship)

January 21, 2026 07:03 am 0 Comments CATEGORY: Estate Planning, Ethics

Selecting a trustee is a pivotal decision in the creation of an estate plan. Trustees hold title to assets in the trust and can often have great discretion over how trust assets are managed and distributed. No single person is more responsible for ensuring the trust creator's wishes are carried out. And yet, many trust creators give little thought to whom they will designate as a trustee, often defaulting to a close relationship, like a family member. But with potentially complex and delicate family dynamics at play, it can be hard for a family member trustee to make the right decision on the trust's behalf – often to the detriment of both the trust beneficiaries (whose interests might not be best served by a conflicted or easily persuadable trustee) and the trustee themselves (for whom the burden of making all of the decisions on behalf of the trust can be extremely stressful).

As a result, it's often a safer alternative to designate a professional "corporate" trustee instead of naming an individual family member. As a neutral third party, a corporate trustee is often better equipped to manage the sometimes-conflicting interests of trust beneficiaries and make objective decisions on behalf of the trust. Additionally, as a professional institution, a corporate trustee has the experience and knowledge to navigate the legal complexities of trust administration and oversight, which an individual or family member may lack. And while the death, incapacity, or resignation of an individual trustee can throw even more confusion and uncertainty into the situation, a corporate trustee, at least in theory, offers continuity for the entire existence of the trust.

Despite the potential benefits of naming a corporate trustee, financial advisors are sometimes reluctant to recommend their utilization to clients. That's because corporate trustees are typically found in the trust departments of banks and other financial institutions, which often aim (and sometimes outright require) to not only serve as trustee but also as the custodian and investment manager of the trust assets. Which means recommending a client to name a corporate trustee could invite the risk of that trustee wresting away the client relationship from the advisor.

However, not all third-party trustees seek to hold and manage trust assets. A small number of corporate trustees specifically hold themselves out as being "advisor-friendly" and focus solely on the administration of trust assets, allowing them to partner with the advisor (who can continue to manage the trust's investments) rather than competing with them. Additionally, there's a whole ecosystem of smaller boutique professional trustees who work closely with (or sometimes are the same as) the attorneys who draft the original documents and can offer highly personalized and knowledgeable services to trusts with specific or complex needs – again, with no fear that the trustee will seek to usurp the advisor's role of investment manager.

In addition to the selection of the trustee, the trust language itself can affect the continuity of the advisor's relationship with the trust after the death of the client who created it. In a traditional "delegated" trust, the trustee has the sole authority to delegate investment functions – which means they can, at least in theory, name a different investment advisor or impose restrictions that materially alter or disrupt the advisor's investment management process. But when the trust is a "directed" trust, the trust document itself specifies who has authority over investment decisions, rather than leaving it up to the trustee, which may ensure that the advisor's relationship with the trust can endure beyond the death of the original client.

The key point is that advisors can have proactive conversations with clients about trustee selection and the authority that the trust document grants the trustee to make or delegate investment decisions on the trust's behalf. Which in turn enables a discussion to learn more about the client's priorities that can help lead them to an appropriate decision. Because ultimately, it isn't just about the advisor's ability to retain the trust's assets after the client's death – it's about understanding what the client truly wishes to happen once they're gone and no longer able to make decisions on the trust's behalf. Which may not always require the advisor to continue the relationship with the trust and its beneficiaries, but for advisors who do build a deep and lasting client relationship, the client may really want to know how to pass that relationship on to the next generation!

Extending Inherited IRA Distributions Beyond 10 Years By Naming Intentionally Non-Designated Beneficiaries

October 29, 2025 07:01 am 0 Comments CATEGORY: Estate Planning

Before the SECURE Act was passed in 2019, non-spouse heirs who inherited IRAs could 'stretch' Required Minimum Distributions (RMDs) over their own single life expectancy, often allowing inherited accounts to last for decades. The SECURE Act replaced that treatment with a 10-Year Rule for most non-spouse beneficiaries, who must now fully deplete their inherited accounts within 10 years, typically much sooner than under the stretch rules would have allowed. Yet, in rewriting the law, Congress left one category of beneficiaries unchanged: Non-Designated Beneficiaries (NDBs).

In this guest post, Brad Herdt, a financial planner at Deseret Mutual Benefit Administrators, introduces a strategy that allows financial planning clients to potentially stretch distributions for heirs beyond ten years – by intentionally using NDB treatment.

For NDBs, the maximum account lifetime is either five years if the account owner died before their Required Beginning Date (RBD) – the point when RMDs must begin – or the decedent's remaining single life expectancy (reduced by one each year and rounded up) if the account owner died on or after their RBD. Which means that after the owner's RBD, an NDB may potentially be allowed to deplete the account over a longer period based on when the owner dies – unlike Non-Eligible Designated Beneficiaries (NEDBs), who face a fixed 10-year window to empty the inherited account.

Importantly, once the owner survives past their RBD, the distribution schedules for NDBs is tied to the owner's remaining life expectancy – which, in the early post-RBD years, can exceed the 10-year rule by as much as five years. At that point, deliberately naming specific beneficiary designations, certain types of trusts, or even the owner's estate (all of which can make the heir an 'Intentional' NDB, or INDB) can stretch the payout period well beyond what an NEDB would receive. Still, as the owner ages and their remaining life expectancy shortens, NDB treatment eventually results in a shorter payout period than the 10-Year Rule – making it advantageous to revert back to an individual (i.e., NEDB) designation.

Even under ideal circumstances, though, an INDB's annual RMDs for the first nine years will always be larger than under NEDB rules – front-loading taxable income. Which suggests that a cost-benefit analysis based on each client's unique circumstances (e.g., the intended beneficiaries' tax outlook and distribution behavior, account-specific factors like Roth earnings maturity and sequence-of-returns risk, and the client's own preferences) is essential. Still, for the right clients – such as those with heirs who can absorb higher early traditional account withdrawals, or those with certain Roth employer plans – the benefit of stretching distributions beyond ten years can outweigh the cost.

Ultimately, the key point is that the INDB Strategy can potentially extend the distribution period by up to 50%, giving heirs more time and flexibility in managing cash flow and taxes. And because the strategy's success depends on understanding the IRS timing and rule constraints, financial advisors can play a critical role in both determining when it's appropriate and helping clients implement it effectively!

Motivating Clients Of All Ages And Life Stages To Stop Delaying Estate Planning

June 11, 2025 07:02 am 0 Comments CATEGORY: Estate Planning

Even with the right messaging and tools, many clients still delay the estate planning process for various reasons. Some may assume that estate planning doesn't apply to their stage of life, especially those in their 30s–50s, who often believe their assets will automatically pass to a partner or children. But that assumption overlooks the nuances of state intestacy laws, which determine what happens when someone dies without a will. Others may agree, in theory, that estate planning is important but never follow through, either because the process feels overwhelming or because they're not sure how to begin.

In this guest post, Dave Haughton, Senior Corporate Counsel at Wealth.com, discusses how advisors can help clients overcome the logistical and emotional roadblocks that often get in the way of taking action. For many clients, the hesitation is more psychological than procedural. Estate planning means confronting death, working through sensitive family dynamics, and making decisions they may not feel ready for. Even clients who are willing to engage may find themselves stalled by the ‘paralysis of analysis' when faced with the complexity of estate planning.

To help move forward, advisors may need to shift the conversation from legal documents to personal values – framing estate planning as a way to preserve family harmony and protect loved ones. These motivators can give clients a clearer sense of purpose and make the process feel more meaningful. Life events such as marriage, divorce, the birth of a child, the sale of a business, or an upcoming international trip create natural opportunities for a conversation about estate planning. When no triggering event is present, timely news stories such as a celebrity estate planning incident can offer a relatable entry point and make the stakes more tangible.

If a client is just starting their estate plan or hasn't revisited it in years, the process can feel daunting. Advisors can ease the burden by focusing first on the essentials: a last will and testament, a revocable living trust, and powers of attorney. Addressing these core documents first can provide clarity and momentum, while creating space to revisit more complex issues over time. Estate planning can then become a recurring agenda item and incorporated into a planning service calendar. This approach can make the process more manageable while reducing the anxiety many clients associate with estate planning.

Ultimately, the key point is that while procrastination around estate planning is common, advisors can play a powerful role in helping clients overcome inertia. By making the process feel approachable and incrementally achievable, advisors can help transform estate planning from an intimidating obligation to an empowering act of care!

Using Subtrusts To Allow Stretch IRA Treatment For Trusts With Multiple Beneficiaries

May 14, 2025 07:01 am 0 Comments CATEGORY: Estate Planning

Owners of IRAs and qualified retirement accounts might name a trust as the account's beneficiary for a number of reasons. They might want to have more control over how the account assets are distributed to their beneficiaries. Or they might want to protect any of their beneficiaries who qualify for means-tested public benefits. In some cases, it might simply be more convenient to name a single entity – like a trust – as the beneficiary of all their retirement accounts, so that any future changes to be made to the trust itself rather than needing to be reflected across all the owner's beneficiary designation form. Whatever the reason, naming a trust as the beneficiary of a retirement account subjects the account to a complex series of rules regarding how the account must be distributed after the owner's death.

The general rule is that trusts are treated as "Non-Designated Beneficiaries" and therefore must fully distribute the retirement account by the end of the fifth year after the owner's death. However, some trusts – specifically, 'see-through' trusts whose beneficiaries all consist of identifiable individuals – can qualify for the more favorable distribution schedules available to Designated Beneficiaries. The caveat is that no matter how many beneficiaries the trust has, the entire trust will generally be treated as a single beneficiary for distribution purposes. That means the distribution schedule is typically based on the least favorable treatment among all of its individual beneficiaries. If all of the trust's beneficiaries are considered Eligible Designated Beneficiaries, the trust may take 'stretch' distributions based on the life expectancy of the oldest beneficiary. But if even one of the trust beneficiaries is a Non-Eligible Designated Beneficiary, then the entire trust is subject to the 10-Year Rule and must be fully distributed by the end of the tenth year after the account owner's death.

When the IRS released its Final RMD Regulations in July of 2024, it introduced a significant new carve-out to the 'single distribution schedule' rule. Under the new rules, if a see-through trust is split into separate subtrusts immediately following the account owner's death, each subtrust can use its own distribution schedule. In other words, under the old rules, a trust with a mix of Eligible and Non-Eligible Designated Beneficiaries would have been automatically subject to the 10-Year Rule for Non-Eligible Designated Beneficiaries. Under the new rule, if the trust is divided into separate subtrusts for each beneficiary, the Eligible Designated Beneficiaries can each receive "stretch" distributions over their own life expectancy – while only the Non-Eligible Designated Beneficiaries will be subject to the 10-Year Rule.

Notably, the IRS regulations only allow this 'separate accounting' treatment when the trust document includes a provision to divide the trust into separate subtrusts before the account owner's death. The trust document must also specify how the retirement account is to be allocated among the individual subtrusts– the trustee cannot be granted discretion to make those decisions after the fact. Additionally, the trust must already qualify as a see-through trust; otherwise, any non-individual beneficiaries will cause the entire trust to be considered a Non-Designated Beneficiary, regardless of whether it's divided into separate subtrusts after the owner's death.

Ultimately, the new "separate accounting" rule creates more flexibility for retirement account owners who want to name a trust as their account beneficiary while still optimizing the tax treatment of distributions for each of the trust beneficiaries. Under the new rules, retirement plan owners with beneficiaries who are both Eligible and Non-Eligible Designated Beneficiaries can ensure that their Eligible Designated Beneficiaries can still receive stretch distribution treatment. But because the provision to divide the trust must be written into the trust document itself, it's important for advisors to work with their clients (and their estate attorneys) to implement any necessary changes in advance!

Estate Planning In The Digital Age: Why Digital Assets Are A Critical Part And How To Help Clients Address Them

March 5, 2025 07:01 am 0 Comments CATEGORY: Estate Planning

Historically, estate planning centered on tangible documentation – wills, account access, and critical information stored in safes or files, with clear instructions for heirs. However, as assets and personal information have become increasingly digitized and moved online, ensuring smooth access to digital accounts has become increasingly complicated. Digital assets range from email accounts and social media to online banking and cryptocurrency – essential elements of daily life that are often trapped behind passwords and authentication barriers. As a result, integrating digital assets into estate plans has become a crucial part of an advisor's process.

Digital assets encompass a wide range of online accounts and property, from financial holdings to sentimental items like photographs and digital media libraries. While cryptocurrency is the most well-known example, even loyalty rewards and social media accounts hold personal and financial value. Yet, contrary to popular belief, providing heirs with usernames and passwords – while crucial – may not be enough.

Because platform privacy policies often dictate how digital assets are handled after a person's passing, unauthorized access can create serious legal and security concerns, including identity theft and privacy law violations. Unlike traditional assets, which are governed by established inheritance laws that dictate how they are handled after a person dies or becomes incapacitated, digital assets often fall under individual service providers' terms of service. Given these risks, it's essential that estate plans include clear, legally recognized instructions for accessing digital assets.

Advisors can help clients navigate this process with a blend of strategic conversations and technology. First, they can help clients create a comprehensive inventory of digital assets, from banking and email accounts to cloud storage and loyalty programs. Next, ensuring that provisions about digital assets are added to the will or trust are key – especially as regulations may allow wills and trusts to supersede a platform's ac–cess restrictions. Once digital provisions are in place, advisors can help clients store this information securely in a digital vault, making it easily accessible to heirs. Finally, maintaining – and periodically reviewing – an up-to-date estate plan that provides for digital assets ensures continued access and security as rules, accounts, and assets evolve.

Ultimately, the key point is that digital assets are a critical but often overlooked aspect of estate planning. When digital assets are given the same attention and care as physical assets, clients and their heirs can have greater peace of mind that their digital legacies will be preserved and transferred smoothly as well!

What To Do When Gifts To Minors No Longer Fit: Adjusting UTMAs, 529 Plans, And Trusts When Family Goals Don’t Align

February 26, 2025 07:02 am 0 Comments CATEGORY: Estate Planning

Parents often want to ensure their children have the resources to pursue their potential and lead fulfilling lives. To achieve this, financial support may start at a very young age, allowing for a longer growth horizon and, in many cases, serving tax and estate planning purposes. However, once a child reaches the age of majority, they may not always be in a position to manage assets responsibly. In these cases, parents may wish to adjust how gifted assets are structured to better align with their family's long-term goals.

While a minor's ownership of property is limited until they reach the age of majority in their state (typically 18), several mechanisms exist to transfer assets while ensuring proper management. Uniform Transfers to Minors Act (UTMA) accounts allow assets – whether obtained through a gift, personal injury award, or earned income – to be overseen by a custodian until the UTMA termination age (often 21), at which point control shifts fully to the child. 529 plans offer greater flexibility in ownership but restrict how funds can be used, particularly for educational expenses. Perhaps the most protective option – though also the most complex and costly – is a trust, as grantors have almost complete flexibility to craft the trust's language to align with the contributor's intentions regarding the control and ultimate distribution of the funds.

In cases where an original gift to a minor no longer aligns with the family's goals, parents may consider restructuring or redirecting the assets. One option is to spend down UTMA assets on non-essential expenses for the child, such as summer camps or a car, while avoiding expenses like food and housing that fall under the parents' legal support obligation. Parents could also transfer UTMA assets into a UTMA 529 plan, which limits the child's ability to use funds for non-educational purposes. In some cases, converting UTMA assets into a 2503(c) trust may provide additional safeguards by granting the beneficiary a brief window (usually 30 to 60 days) to withdraw funds upon reaching age 21. If the beneficiary does not exercise this right, then the assets can remain in trust for continued protection and oversight. For parents who have already made a gift through an irrevocable trust, including a power of appointment provision may offer added flexibility, permitting distributions to be redirected to another individual or adjusted based on changing circumstances.

Ultimately, the key point is that gifting assets to a child can be a powerful way to provide for their future, but flexibility is crucial. Parents often reconsider their approach as their child approaches adulthood, and advisors can play a key role in helping them anticipate potential risks. By choosing flexible savings options from the outset or, when necessary, adjusting previously funded UTMAs or trusts, advisors can help ensure that gifted assets serve their intended purpose: supporting the child's future in a way that aligns with the family's long-term financial and estate planning goals!

Using Digital Estate Planning Platforms To Complement Attorney And Advisor Roles

September 4, 2024 07:01 am 0 Comments CATEGORY: Estate Planning

As digital software solutions become more sophisticated (and new ones continue to roll out at breakneck speed), they may offer relief with what they offer but, at the same time, they may also introduce a burden for the user to vet and review the results to ensure that it actually provides the 'correct' output. When it comes to digital estate planning solutions tools, this particular burden is amplified not only because of the many clients who need an estate plan (with about 2/3 of Americans estimated to be without a will!), but also because advisors may be concerned that choosing the wrong estate planning solution could create a risk involving legal action, engagement in the unauthorized practice of law, and user error. That being said, advisors who understand how to review and use these tools well can leverage their features and provide considerable value to their clients.

As a starting point, it is important to know what digital estate planning solutions can actually do. Platforms generally help users in the following 3 areas: document creation (creating basic documents such as revocable trusts, powers of attorney, healthcare directives, and wills), document extraction (providing easy-to-read summaries of existing estate planning documents), and estate visualization (creating visual reports that detail the estate plan in a user-friendly matter). Today, services in each of these areas can be provided to users of software technology – without ever having to sit down with an attorney face-to-face.

For some advisors, implementing digital tools as part of their estate planning process can be daunting because they lack the reassuring expertise an actual attorney can provide. Furthermore, a stigma is sometimes associated with 'boilerplate' language or generic document templates. However, in most instances, advisors can help clients realize that boilerplate language can be legally valid, enforceable, and sometimes even preferable (and in many instances, estate planning attorneys themselves often use boilerplate documents anyway!). Accordingly, a digital solution can offer an alternative to the typical process of creating documents after physically meeting with an attorney. Certainly, in more complex situations – such as with ultra-high-net-worth clients, families with unique relationship dynamics, or disabled beneficiaries who need to preserve access to government benefits – an attorney may be required to draft customized estate planning documents or, at the very least, carefully review estate documents created by digital planning solutions. But for the vast majority of 'typical' clients, a digital solution could satisfy a client’s estate planning needs.

One particular concern for financial advisors involved in their clients' estate planning needs is unintentionally engaging in the Unauthorized Practice of Law (UPL) by actually giving estate planning legal advice. While this can create particular liability issues for advisors, digital estate planning solutions can help advisors avoid UPL by providing guardrails that safeguard them from doing so, and by helping them frame their conversations with clients as education and guidance about the options available to them. For example, an advisor may be prompted by the software tool to tell their client: "It may be beneficial to look into whether a spousal lifetime access trust could make sense for you. Here's what it is…". This helps the advisor remain removed from implementing strategies and not risk crossing the line into UPL, but still being able to monitor the client to make sure that things get done.

Ultimately, the key point is that digital estate planning solutions can provide powerful tools that complement the roles both estate attorneys and advisors play for clients, especially for (the many) clients with less complex estate planning needs. With the help of software tools, advisors may find that initiating conversations and offering guidance around estate planning strategies for clients can be carried out much more efficiently and even add to the value they're already providing!

Utilizing Swap Powers In Irrevocable Trusts To Add Flexibility And Income Tax Efficiency

August 21, 2024 07:01 am 0 Comments CATEGORY: Estate Planning

Irrevocable trusts lie at the heart of a variety of estate planning strategies, as gifts to irrevocable trusts can allow for the transfer of assets outside of an owner’s estate for estate tax purposes with more structure than an outright gift. The downside, however, is that irrevocable trusts are "irrevocable" and can't easily be undone; in moving assets to the trust, the original owner gives up their authority over the assets, with the trustee taking over the management and distribution of the assets according to the trust's instructions. Sometimes, though, the original owner may want to take a 'mulligan' when the assets inside the trust would be more advantageous back inside their estate. Including the power of substitution when establishing the irrevocable trust can provide the opportunity to redo the funding of the trust, without jeopardizing the estate tax benefits that the trust conveys.

In this guest post, Anna Pfaehler, CFP, AEP, a Partner and Wealth Advisor at Constellation Wealth Advisors, discusses how "swap powers" – the ability to exchange assets in an irrevocable trust with other assets of equivalent value – can be used to add flexibility and income tax efficiency to an irrevocable trust.

At a high level, swap powers are often included in trusts because, under the Internal Revenue Code, they turn an irrevocable trust into a Grantor Trust where any income generated by the trust assets is taxed to the grantor (i.e., the assets' original owner). This can be advantageous given the generally higher tax rates imposed on trusts compared to individuals. If the trust is drafted as an Intentionally Defective Grantor Trust (IDGT), the trust's assets are also considered outside of the grantor's estate for estate tax purposes, giving the grantor the best of both worlds when it comes to income and estate taxation.

However, while grantors often include swap powers in their trust provisions to convey Grantor Trust status, many never actually use the swap power for its nominal purpose of exchanging assets within the trust with others of equivalent value. But swap powers can create planning opportunities to take advantage of the differences between types of assets and to optimize the trust's balance sheet as circumstances shift over time.

For example, if an asset within an irrevocable trust has substantially grown in value, that asset will not receive a step-up in basis when the grantor passes away if it remains in the trust, resulting in significant capital gains tax if it is sold later. But if the grantor uses a swap power to exchange the asset for something equivalent in value but with a higher cost basis, they can maximize their benefit from the step-up in basis by keeping the lowest-basis assets on their own balance sheet and the highest-basis assets in the trust. Swap powers can also be used to meet liquidity needs by exchanging more liquid assets in the trust, or to move assets with higher expected growth into the trust to shield their future growth from estate taxation.

The key point is that life goes on even after an irrevocable trust is drafted and funded, and shifting circumstances after the fact can leave grantors wishing for a do-over. And although swap powers won't necessarily solve every potential issue with the irrevocable trust that could arise after the fact – since there needs to actually be property of equivalent value that can be swapped into the trust to use them – it does at least create the flexibility to optimize the trust for whatever the situation at hand may be. Ultimately, advisors can help clients navigate their changing circumstances by recognizing opportunities to re-optimize their financial situation and by making the adjustments (such as a well-executed asset swap) that increase the chances of a better outcome as the client's future unfolds!

Making Estate Planning More Tax Efficient And Equitable For Beneficiaries By NOT Just Splitting The Assets Evenly

August 7, 2024 07:02 am 0 Comments CATEGORY: Estate Planning

Traditionally, people tend to think of their estate as comprising one big 'pot' of assets, focusing on the sum of all the assets rather than on each individual asset itself. Consequently, when in estate planning, thinking about how to divide their assets after their death, they often aim to simply apportion the whole pot among their beneficiaries, without regard to the nature of each individual asset.

Although the 'one big pot' mindset might be the simplest approach to estate distribution, it may not be the one that results in the most wealth being passed down or the most equitable distribution of assets between each beneficiary. That's because, depending on the beneficiaries' individual situations, different types of assets will have different tax characteristics when inherited, which might make particular assets better or worse for different beneficiaries depending on their tax circumstances. For instance, if a traditional IRA is split equally between 2 beneficiaries in different tax brackets (or in different states of residence with different state tax rates), the beneficiary in the higher tax bracket will pay more tax on their share of the IRA (and consequently receive less on an after-tax basis) than the other.

Consequently, it can be beneficial to approach estate planning on an asset-by-asset basis to make the process more equitable and tax efficient by accounting for the disparity of income tax treatment of the different assets in the estate (and the unequal tax circumstances of the beneficiaries who will inherit them). For instance, an estate with a mix of pre-tax retirement assets (taxed upon withdrawal by the beneficiary) and nonqualified assets (which typically receive a step-up in basis and have fewer tax consequences for the beneficiary) can be allocated such that the pre-tax assets are left to the beneficiary with a lower tax rate and the nonqualified assets to the beneficiary with a higher tax rate. Then not only will each beneficiary receive the asset that results in the highest after-tax value to them, but the total after-tax value of all the assets passed down will be higher than if they were each simply divided equally between the beneficiaries.

Notably, an asset-by-asset approach to estate planning isn't 'just' about drafting documents like wills or trusts; it requires full knowledge of the client and the details of their (and their beneficiaries') financial, tax, and overall life circumstances. Which leaves financial advisors in a unique position to aid in the process of deciding when an asset-by-asset approach will result in sizable tax savings for the estate and beneficiaries and when a traditional 'split-the-pot' approach would make more sense. As while estate attorneys may meet with the client only rarely (if at all) after the actual estate documents are drafted, advisors usually have regular recurring meetings with clients, giving advisors the opportunity to keep up with the family's dynamics and tax situations and recognize when a change would be warranted.

The key point is that, just as clients have different planning needs, goals, and tax circumstances during life, the same applies to their beneficiaries and assets after they're gone. Incorporating the impact of taxes in the financial planning process to help clients keep more of what they've earned in life makes as much sense as using the same approach in the estate planning process, by considering what happens from a tax perspective after the assets reach their intended destination. And, by offering a more equitable distribution scheme for their beneficiaries, advisors can help their clients ensure they pass the most (after-tax) wealth to the next generation!

Creating Incentive Trusts To Foster Beneficiary Legacies Without Spoiling The Kids

June 19, 2024 07:01 am 0 Comments CATEGORY: Estate Planning

The role of estate planning is most commonly considered to be about transferring assets from one generation to the next in the most efficient manner possible (e.g., how to minimize the burden of estate taxes and avoid the public spectacle of the probate process). And yet, looking at estate planning solely through the lens of assets on a balance sheet can make it easy to overlook the reality that people often have other, intangible assets that they wish to pass on to the next generation, such as values, lessons, and opportunities to pursue lifelong passions that can't be achieved – and in many cases may be contradicted – by a simple transfer of cash.

So it often makes sense to think of estate planning not only in terms of which assets go to which person, but also in terms of how best to use those assets to incentivize the types of behavior that the assets' owner wants to instill in their heirs. As while will-based transfers and cash gifts generally impose no restrictions on how they're used by their beneficiaries, certain types of trust-based estate plans can allow an individual to set very specific guidelines for how their assets are held and under which circumstances they can be distributed.

The most common example involves trust provisions that direct assets to be distributed to beneficiaries once they obtain a certain age (e.g., at age 21 or 30) or stagger distributions at multiple ages. However, it's possible to get much more specific and to allow distributions that are tied to specific conditions that incentivize the beneficiary, such as academic achievements (like maintaining a certain GPA or attaining advanced degrees), life events (like getting married or buying a first home), or even the level of the beneficiary's own earned income (like allowing for 'matching' distributions equal or in proportion to the amount of income that the beneficiary earns).

In addition to incentivizing behaviors, trust provisions can also include tools to disincentivize certain behaviors. For beneficiaries who have known behavioral issues such as gambling or substance abuse, the trustee may be able to delay distributions until there is evidence that the behaviors have been curtailed. Likewise, an individual wanting to avoid litigation or family conflict as the result of a contested estate (e.g., by a family member who feels they were treated unfairly) can include a "no contest" clause that effectively disinherits anyone who takes legal action against the estate.

The key point is that as with most financial planning topics, advisors can play a role in helping to guide clients to the most appropriate solutions for their goals, including how to carry on their legacy of personal values. By asking questions to clarify the client's aims in leaving money to their beneficiaries and then helping them find an estate administrator or trustee and an attorney who can draft a trust that reflects the client's goals, advisors can assist clients in making sure their legacy is preserved for generations to come!