As Samuel Goldwyn said, it is "really hard to make predictions, especially about the future." Certainly nobody has a reliable crystal ball when it comes to estate planning. Asset values rise (or fall), family relationships evolve (or disintegrate), trusted advisors remain steady (or prove unreliable), people move from here to there. Because it's so hard to get clients to do their estate plans, you should at least guide them to one that will withstand the winds of change. This is especially important for high-net-worth clients who have at least $1 million in investable assets, who are most likely to be affected by estate tax. The artful advisor will help clients develop plans that will work whether they die tomorrow, or live to be 120. Flexible planning means they will be better prepared for the outcome, which will be somewhere in between.

What flexibility do clients need? Let's start with estate taxes because tax planning, despite its complexity, is often the easiest piece of the puzzle—at least compared with the messy emotional issues that can surface in the estate planning process. A fundamental tool for reducing overall estate tax exposure is the bypass trust, also known as an exemption trust, credit shelter trust or A/B trust. Its cousin, the unlimited marital deduction, lets a surviving spouse avoid estate tax upon the death of the first spouse, but is really only a delaying tactic since everything is taxed on the death of the second spouse. In contrast, the bypass trust allows assets to be set aside for use by the surviving spouse (or a non-spouse partner), but because he or she never controls the trust, the assets will pass to the ultimate beneficiaries without being subject to estate tax. This is a great strategy. But how do you use it if you don't know when people will die, how rich they will be or what tax laws will apply?

The Magic Number

Financial advisors all know that today's federal estate tax law lets each individual transfer up to $2 million at death without any tax on that transfer, depending on the amount of lifetime gifts above the annual gift exclusion amount (currently $12,000 per donee, exclusive of gifts for education and medical expenses). If your clients John and Mary have a gross taxable estate today of more than $4 million (including investments with you, the net value of their home, retirement plans, life insurance, etc.), they could benefit from an estate plan that includes bypass trusts, so each of them can take full advantage of the exemption amount.

But you also know that the "magic number" that represents what can pass free of estate tax is scheduled to increase until 2010, when it reaches infinity, only to drop to $1 million in 2011. In light of this, should advisors steer their clients toward bypass trusts? The trusts could turn out to be more restrictive than necessary, but not having the option could be expensive—depending on factors such as inflation, which could push clients into taxable territory before the law catches up.

There's another element planners need to consider: John and Mary might live in a state that has lower limits on assets that can pass free of estate tax than the federal law (for example, in New York the magic number is $1 million and in New Jersey it is $675,000). If that's the case, couples with a combined gross taxable estate that falls between the state tax-free number and the federal number may be in for an unpleasant surprise. If this is the case in your state, be sure to inform your clients and suggest that they discuss it with their lawyers. If you don't, someday someone may ask why you didn't speak up.

What can you do about these murky situations? Give the surviving spouse the right to exercise a disclaimer (called a renunciation in some states) to make the plan flexible. If John and Mary separate their investment assets into "his" and "hers," they can draft documents that say, in essence, "everything to my honey, but to the extent that my honey says, 'No thank you,' put the disclaimed amount into a bypass trust for my honey." If the surviving spouse exercises the disclaimer, the assets pass to a trust he or she will enjoy, but not control. The reward? Upon the death of the survivor, the trust assets will not be subject to estate taxes and the beneficiaries will receive more than they would have otherwise.

This gives the survivor the flexibility to evaluate all of the facts with his or her advisor when the first spouse dies. You can help the surviving spouse look at the financial circumstances, tax laws, health, age and family dynamics in order to set the best course. For example, if their assets lost value between the time they draft their documents and when John dies, Mary might choose not to exercise the disclaimer since a bypass trust wouldn't be necessary for the diminished estate. Similarly, if John leaves Mary with children to educate she might not exercise her disclaimer because she will need the money.

Alternatively if there is another source of money, she may welcome the security of the bypass trust existing outside the orbit of her inexperienced money management. Or she may like the fact that if she remarries, she will never have to utter the word "prenup" to protect her children's interests. The assets that go into the bypass trust can be used for Mary's benefit (and the children's, if drafted that way) or left to grow. The bypass trust is subject to income taxes over the years (and you should plan its investment strategy with that fact in mind), but whatever it holds when Mary dies will pass untaxed to the beneficiaries.

The flexibility of disclaimer planning is miles ahead of old-style "I love you" wills that simply give everything to the surviving spouse outright—especially after you've helped an estate grow to a point that is clearly taxable under federal or state rules. Disclaimer planning also beats documents that automatically create a bypass trust when the first spouse dies. In a state like New York, where the magic number is lower than the federal one, automatically funding the bypass trust to the higher federal limits will cost actual out-of-pocket tax dollars today.

Whatever the facts, the disclaimer plan will let the surviving spouse fine-tune exactly how much should go to the bypass trust. By including more disclaimer language in their plan, John and Mary can take flexibility a step further by letting adult beneficiaries disclaim assets to charity to reduce taxes and achieve philanthropic goals. In effect, with a flexible plan, John, Mary and you don't need a crystal ball. You are prepared for rising or falling fortunes and expanding or contracting exemption limits under the tax law.

For a disclaimer strategy to succeed, assets need to be titled properly. You can help make this happen. Assets that are held as joint tenants with right of survivorship leave no room for tax planning because they pass to the joint tenant automatically when the first spouse dies. In contrast, accounts held as tenants in common allow for tax planning, because that form of ownership lets the surviving spouse exercise a disclaimer effectively. Note, however, that tenants-in-common ownership sacrifices the probate-avoidance feature inherent in joint tenancy. If John and Mary want to recapture the convenience of avoiding probate, they'll need to discuss revocable living trusts with their lawyer—trusts which you'll need to help them fund. Don't forget beneficiary designations during this asset review process: perhaps making the life insurance payable to Mary or to the bypass trust for her benefit.

Pesky family issues that lurk in the background require flexibility, too. John and Mary can choose the corporate or individual trustees who will work with their family for years—but what if the surviving spouse doesn't get along with that trustee? Advisors can encourage clients to ask about language that gives the surviving spouse (and maybe the adult children) the right to dismiss one trustee and move on to the next. (The attorney may suggest giving beneficiaries limited rights to name successor fiduciaries, within limits set with the tax code in mind.)

Distribution Options

What about dividing the estate? If the children are adults, the answer almost always should be in equal shares. But if John and Mary have a fatal accident and leave young children, they should consider a common pot, so the trustee can take care of the kids according to their needs, not mathematical equality. John and Mary would never say that Susie should get extra money because Scott needed orthodontia, or that Craig's tutoring expenses entitle the other kids to fancy toys. Why not give their trustee the power to meet the needs of each child? When they have all reached a baseline set by John and Mary—when each child, say, has reached age 24 or graduated from college—the pot could be split equally.

While designing the common pot trust, John and Mary might also give the trustee the power to help the guardian—to add an extra bathroom to the house, hire more household help or do whatever else will make life easier for the guardian. This would take place, of course, within the limits of the available resources and the parents' long-term goals, such as education for the children.

What about the rotten son- or daughter-in-law who figures into so many family sagas? Instead of making an outright distribution to daughter Susie that could end up in the hands of her feckless husband when she dies (if not before!), her share could go to her via a carefully crafted trust so that it is protected for her use, even if his harebrained business schemes go sour or they get divorced.

What about the grandchildren? Alas, as cute as they are now, they may reach a stage where they only care about sex, drugs and rock 'n' roll. Put their shares in trust too. Give the trustee the power to distribute principal at intervals, but steer distributions toward education, buying a house, starting a business or whatever the trustee deems "prudent." For greater flexibility, the attorney might write in an escape clause specifying that if a beneficiary is plagued by mental illness, or being sued or divorced at the time scheduled for a trust distribution, for example, a further trust could be created to protect the assets. Remember, a trustee who has broad discretion can always distribute assets.

Encourage your clients to think for a minute about what should happen if none of their near and dear ones survive them. Suppose, for example, John, Mary and the kids all disappear into the Bermuda Triangle during that fabulous Caribbean vacation? Documents should name contingent beneficiaries if there is a total wipeout. Contingent beneficiaries could be relatives, friends, charities or any combination of those categories.

Besides increasing their wealth, you can help your clients increase their peace of mind. Encourage them to work with their attorneys to design plans that rely on flexible options, intelligently exercised, and they will be as prepared for the unknowable future as any one of us can be.

Barbara H. Cane, Esq., helps clients take care of themselves and those they love by planning and settling estates. Visit her website at www.canelaw.net.