Articles About 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!

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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!

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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!

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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!

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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!

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Financial advisors add value for their clients not only by helping them grow their wealth, but also by working with them to create a plan for how to use it. While much of this process may focus on the client's own lifetime planning needs (e.g., helping them develop a retirement income plan), it often also addresses the client's goals for their wealth after their death. With this in mind, many financial advisors offer estate planning guidance to clients. However, because few advisors are also legal professionals (who can offer more detailed guidance and draft legal documents), many often collaborate with estate planning attorneys to ensure their clients' estate planning needs are met.

In this guest post, David Haughton, Team Lead for Advanced Planning at Commonwealth Financial Network, explores the relationship between financial advisors and estate planning attorneys, how advisors can add value for clients during the estate planning process, and how advisors and attorneys can create mutually beneficial arrangements.

Financial advisors can play a valuable role in the strategy, implementation, and funding stages of the estate planning process. For example, advisors can start by identifying whether a client even has an estate plan in the first place and, if so, what the current plan entails. The advisor can then consider whether the current plan (if it exists) meets the client's estate planning goals and, if needed, encourage the client to engage with an estate planning attorney who can recommend potential solutions (ideally in consultation with the advisor, who will be intimately familiar with the client's financial situation and goals) and draft the legal documents necessary to execute them. In the implementation phase, financial advisors can review the estate planning documents to ensure they are appropriate to meet their client's needs and confirm that the client actually executes the documents. Finally, in the funding phase, advisors can provide value by ensuring that accounts are retitled as necessary so that the client's assets are appropriately positioned to meet the goals of their newly crafted estate plan.

Sometimes, estate planning attorneys might be reluctant to work closely with a client's financial advisor. For instance, an attorney might balk at the estate planning suggestions offered by a client's financial advisor (who does not work on estate planning issues full time), while an advisor might question an attorney's proposed strategy (e.g., the attorney might not be aware of a client's ability to actually execute the proposed plan). Nevertheless, the reality is that both the financial advisor and estate planning attorney have much to gain by cooperating with each other, not just to ensure that their mutual client receives a properly prepared estate plan that meets their goals, but also because building a trusting relationship could lead to mutual client referrals down the line (as many estate planning clients could benefit from financial planning services, and vice versa)!

Ultimately, the key point is that financial advisors can add significant value for their clients throughout the estate planning process, from evaluating their current plan to helping them find a qualified estate planning attorney, to working with the attorney to ensure the new or updated plan meets their client's goals and is executed and funded appropriately. And while the advisor's engagement in the estate planning process can increase the level of trust and loyalty between the advisor and their client, it also sets the table for a strong relationship with their client's heirs when the client's assets are distributed at their death, continuing the legacy of providing valuable financial planning to family members when they may need it most!

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In late 2019, Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act, introducing several significant changes to retirement planning. Of the many provisions in the bill, the so-called "Death of the Stretch" arguably received the lion's share of consternation from the financial advisor community. Under the new law, non-spouse beneficiaries (with few exceptions) must now withdraw the entirety of an inherited IRA within 10 years of the account owner's passing rather than over their own lifetimes. This shift has led financial advisors to explore new strategies for mitigating the resulting tax-planning challenges. One effective approach is the use of a Testamentary Charitable Remainder UniTrust (T-CRUT). As a non-person entity, the T-CRUT is not subject to the 10-Year Rule and can be designated as the IRA beneficiary while naming the original non-spouse beneficiary as an income recipient of the trust and a charitable organization as the remainder beneficiary. This allows the account to grow on a tax-deferred basis, with income to beneficiaries being taxed when distributions are made.

In this guest post, Kathleen Rehl, a "reFired" financial planner and author of "Moving Forward on Your Own: A Financial Guidebook for Widows", shares her story of how (and why) she used a T-CRUT to create, upon her passing, a steady stream of income for her son, thus preserving the wealth of his legacy over time, avoiding the income tax burden that he would potentially encounter as the sole beneficiary of her IRA, and leaving a portion of that account to various nonprofits she supports.

Notably, her strategy to preserve her son's wealth while meeting her own charitable goals relies on 4 key principles. First is that the underlying vehicle is a Charitable Remainder UniTrust (CRUT), which pays a fixed percentage of the trust's value for either a specified number of years (not to exceed 20) or through the lifetime of the beneficiary. Second is that the CRUT is testamentary (i.e., it is an 'empty basket' that doesn't receive funds until the owner's passing). Third, the IRA assets are directed to the T-CRUT as its funding source upon her passing, and fourth, that, at the end of the specified period, a minimum of 10% of the initial fair market value of the assets placed within the trust is transferred to a qualified charity (or charities) as the final remainder beneficiary.

While such a strategy may not provide the same level of after-tax benefit to her son if he were to inherit her IRA outright (where he would be faced with the temptation to empty the account and spend the proceeds immediately), the T-CRUT strategy ensures her son's financial security through an annual income stream lasting into his retirement as well as leaving a charitable legacy that matches her values. As such, while leaving funds in an IRA may be the better option for those seeking to maximize wealth, using a T-CRUT to preserve wealth for a beneficiary while meeting philanthropic goals can be a very appealing solution.

Ultimately, the key point is that there are a number of tools that financial advisors can use to help their clients' beneficiaries circumvent the tax burden (as well as other potential challenges) associated with inheriting retirement accounts. More importantly, using various tax-efficient "Give It Twice" charitable tools allows financial advisors to help their clients create comprehensive estate plans that can benefit both their loved ones and the causes that are most meaningful to them!

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As more Americans are living well into their 80s and even into their 90s, the spectrum of risks that an aging population faces is only getting wider. The need to address longevity risk has become increasingly important, allowing financial advisors to add even more value for their clients by ensuring that their financial needs are met throughout retirement. This is particularly relevant when cognitive or physical impairments diminish (or eliminate altogether) their ability to make decisions on their own, and it becomes necessary to transfer those responsibilities to someone else. And while transferring responsibility may be relatively easy for accounts that are jointly titled or held within a trust, other accounts, such as qualified savings vehicles or annuities, require a Power Of Attorney (POA) when delegating decision-making authority to a third party.

In this guest post, David Haughton, the Team Lead for Advanced Planning at Commonwealth Financial Network, explores the importance of comprehensive POAs and how they can be constructed to avoid many of the common pitfalls that loved ones may encounter when accessing an incapacitated person's assets.

When it comes to giving someone the authority to act on behalf of a grantor, an essential consideration when developing a POA is durability. Unfortunately, nearly half of all U.S. states do not consider POAs to be durable (i.e., these states do not consider the POA in effect after the grantor's incapacitation) unless they expressly state otherwise. Moreover, even if durability is established, it's important to distinguish between an immediate POA, which is effective as soon as the document is signed, and a springing POA, which won't be effective until the grantor becomes incapacitated, and that incapacitation has been certified by a doctor as well!

Still, even with a durable and immediate POA, financial institutions are often reluctant to grant access to a grantor's accounts, which is understandable given the amount of fraud and elder abuse present in society. There are several reasons for financial institutions to prevent an agent from being added to an account, including the age of the POA itself and whether the document was prepared so long ago that it is considered 'stale', any number of (nuanced) state-specific signature formalities (e.g., notarization or witness requirements), the inclusion of multiple agents (which are often prohibited by financial institutions simply for the logistical complexity of getting more than one signature), complications with forms that are specific to an individual financial institution (but not others), and a failure to specify that the agent is authorized to take actions that are otherwise prohibited under the Uniform Power Of Attorney Act (UPOAA).

As a result, taking a 'kitchen sink' approach to drafting POAs is advisable, even if the resulting document may seem overly complex and lengthy. By including every possible specific power an agent could conceivably need when acting on behalf of someone else, the chances that an institution might block an agent from taking various actions (like making a gift or changing beneficiaries) are greatly reduced.

Ultimately, the key point is that a properly drafted POA is an essential part of every estate plan. By using a 'kitchen sink' approach when granting a loved one the authority to access a client's assets, an advisor can help ensure that their financial needs can be met at a time when they aren't able to act on their own behalf. While it's important for financial institutions to protect their customers from fraud and abuse, the roadblocks that can prevent an agent from taking action can be numerous and complex, meaning that advisors who understand the nuances around navigating those hurdles can help their clients gain peace of mind knowing that their needs are met at a time when they need help the most!

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