Estate planning tends to focus on minimizing taxes, especially for high-net-worth individuals, but personal problems may be more pressing for some clients. For such people, the success of the planning process hinges more on dealing with their issues than with their legal, tax and technical matters.
Personal issues can involve a myriad of matters, including lifestyle choices, drug addiction, religious practices, health concerns, charitable goals and preferences regarding the disposition of collectibles or other personal property. Too often, planners assign these soft topics secondary importance and, as a result, even the best-designed plan can fall short of achieving everything a client hopes to address.
It is not hard to understand why this happens. Some clients or advisors feel uncomfortable addressing qualitative, vague or personal issues. Other advisors may believe they lack the knowledge or resources to deal with these kinds of problems. In these cases, bringing in outside experts (for instance, a care manager or a family counselor) or partnering with the clients' other advisors may fill the gap.
The real impediment in many cases is that some clients feel it is safer to focus on taxes and other standard issues than it is to focus on the problem of, say, an estranged child or a serious health issue. Yet, a skillful planner can shine by creating a safe environment for the client to explain his or her real concerns.
When an heir, spouse or partner is living with a debilitating addiction to alcohol, drugs or gambling, getting a family to move forward on planning can be extremely difficult. This may be because addictions are often intertwined with guilt, embarrassment and other negative emotions. But if a client can explain the realities, planners can help address the issues.
Bequeathing assets in a trust, with appropriately selected trustees and provisions that permit distributions to be made to other parties or even withheld if an addiction or other problems remain, may not only allay a client's worries, but also help to save the heir involved.
Specifically, planners can:
* Confirm that assets are not held jointly with the heir involved (no payable-on-death or transfer-on-death accounts or joint tenancy with rights of survivorship).
* Insert provisions in a client's power-of-attorney statement to assure that indirect payments will be available to help an heir in lieu of direct payments, or no provisions at all.
* Create a revocable living trust to control assets in the event of a parent's disability so that protection can be afforded to an heir with an addiction.
* Designate a trust as the beneficiary of retirement plan assets to protect against a rollover to an heir who could pull all the money out of a plan and use it to fund a habit.
COMPETENCY AND HEALTH ISSUES
The aging of the population and the threat of certain chronic diseases make competency a growing area of importance for planners to address. If a client is not competent, any document he or she signs or any transaction will be ineffectual. Waning competency creates the need to take protective measures for a client long before an issue becomes critical. Since competency is usually a progressive issue over an extended period, planning in advance is advisable. Protecting clients from elder financial abuse or undue influence by outsiders is another important planning objective.
Common steps include:
* Consolidating and simplifying asset holdings, and eliminating unnecessary accounts.
* Using a post office box to prevent inappropriate interference.
* Designating an independent person - not a beneficiary, but perhaps an independent CPA - who can monitor bank and brokerage statements and other activities, and summarize all monthly financial transactions.
* Creating automatic payments to eliminate or minimize the potential for missed deadlines.
* Fostering an estate planning team with independent members to minimize the chance of a renegade advisor's taking advantage of an infirm client.
Too often clients designate agents and trustees, particularly guardians for minor children or health proxies, with consideration to who might be insulted if not named, rather than who will best fill the role.
The Health Insurance Portability and Accountability Act of 1996 protects your confidential medical information. Authorizing the disclosure of sensitive medical information is a common planning step. But too often, disclosure authorizations are broad, unlimited and all-encompassing. This can unintentionally authorize inappropriate access to a client's records.
This issue often spans multiple disciplines and professional advisors, and can be a balancing act. Insufficient authorizations can stifle important planning steps, while excessively broad authorizations can result in embarrassment or worse.
It's important to address the distribution of assets that have great sentimental or personal value, even if the economic value is modest. Distributing family heirlooms can be as much about passing on a legacy and memories as it is a legal formality. As the use of entities and trusts proliferates, determining which entity or trust owns a particular item of tangible personal property is critical.
In cases where there are many pieces of art or other goods of value, it may be beneficial to create a structure in a will for heirs to distribute the goods in a fair manner. Options might include bidding for property with an allotted number of points for each designated family member, holding a lottery or setting up a rotational selection in which, say, children select in age order, with the order reversed after each round.
Succession within a family business is often a critical matter not only for a client, but for generations to follow. If proper documentation and funding are not tended to, success will prove elusive. While sophisticated dynastic trusts may address estate-tax issues, they often are insufficient in addressing cash flow needs of a business in transition, selection of future investment trustees to determine whether to continue holding business interests, and so forth.
Multicultural families are quite common, and planners should help clients evaluate how lifestyle, religious or cultural observances should be dealt with in a living trust or other documents.
* Selection of fiduciaries (guardians, trustees and others) who have not just financial integrity but knowledge of a parent's wishes about the cultural and religious observances to be followed in raising children.
* Funeral decisions. Which customs or religious guidelines should be adhered to?
* Letters of instruction clarifying issues such as the raising of children.
Advisors can serve a vital role in integrating human considerations into the estate planning process. This starts with actively, sincerely and intently listening to clients. But it also involves paying attention to the background music at meetings, as well as to the silence - what is being said or not being said, body language and who attends. Successfully addressing human problems can be incredibly beneficial to a family and professionally rewarding to a practitioner.
Martin M. Shenkman, CPA, PFS, J.D., is a Financial Planning contributing writer and an estate planner in Paramus, N.J. He runs laweasy.com, a free legal website.