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What advisors should look for in legal documents

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Most financial planners are understandably loath to crack open a client’s legal documents, considering them outside their area of expertise.

But in every estate planning document there are a number of points that planners can identify to review with clients. Here's what they should look for:


If a client becomes incapacitated, who will give the financial planner directions?

For individual accounts, this will often be the agent named under a client’s durable power of attorney. Planners should ask whether a client has such a durable power and obtain a copy. Some provisions to consider include:

Gifts – Does the document authorize the agent to make gifts? If the client is not supporting other family members and does not face an estate tax, is such a provision warranted? Too often the gift provision is boilerplate that has little relevance to the client’s circumstances.

Beneficiary Designations – Does the document permit the client to change beneficiary designations on an account? In many cases, the provisions are so broad they could permit the agent to name herself as the beneficiary to the exclusion of others. Be certain that this provision and the gift provision work in concert and reflect your client’s potential planning needs.

Investments – Many power-of-attorney documents do not mention investments other than a general authorization to conduct banking or securities transactions. If the client has existing holdings or unique investments, will the general investment directions permit those to be continued? Many agents try to continue whatever investment plan the client might have pursued. But unless the power of attorney document permits such a path, the agent might be held to the standards of a prudent investor with appropriate diversification.


Wills (or in many instances a “pour over will” that pours assets into a trust created during the client’s lifetime) provide for the disposition of assets on the client’s death. In many instances, the bequests are made into trusts for various beneficiaries. If the financial planner will be called upon to invest estate and later trust assets, a number of provisions should be discussed with the client:

Standards - What investment standard does the document require? Financial advisors should review these provisions ahead of time as the document may have odd standards that might conflict with the investment policy pursued by the client, or that might be inappropriate for an heir. Does the investment provision permit the present plan?

If a beneficiary has a particular need, be certain that the investment provisions permit that to be addressed. Too often lawyers draft these provisions relying on standard clauses without knowing which investment approaches the client actually wants.

Taxes - Consider the tax consequences of any trusts created upon a client’s death? Which states might tax the trust? Is there sufficient flexibility to change trustees or take other steps to diminish or avoid state taxes?

Strategies - A common estate planning strategy on the death of a spouse is to fund a bypass or credit shelter trust and for the remaining assets to pass to a trust qualifying for the estate tax marital deduction.

Assets in the martial trust might be included in the estate of the surviving spouse upon their demise. Assets in the bypass trust avoid taxation on the surviving spouse’s death. Since assets in a bypass trust don’t receive a basis step upon death, the financial advisor might opt to use more actively traded investments in the bypass trust to minimize the unrealized appreciation in that trust upon the surviving spouse’s death.

To have the flexibility to invest each trust in the manner that is best for the beneficiary, the document that creates them should have more than just a boilerplate investment clause.


It is common for clients to create irrevocable trusts that are taxed to the client for income tax purposes (grantor trust). Perhaps most of these should include a swap power so the client/grantor can return appreciated assets to their estate in exchange for cash.

That maintains the same estate tax benefits but facilitates bringing appreciated assets into the client’s estate to provide for an increase in income tax basis on the client’s death (basis step up). If this power is missing, suggest the client review with their attorney whether it can be added through a decanting (merger) of the trust. Without a swap power, maximization of the net of income tax returns for the family can be hindered.

Many irrevocable trusts include an annual demand or “Crummey” power. This provision has the trustee give notice to the beneficiaries when gifts are made to the trust so they qualify for the annual gift exclusion. Even if your client will not face an estate tax, it is necessary to meet these criteria to avoid having to file a gift tax return. So confirm that these provisions in the trust.


It's common for clients to hold investment assets in LLCs and FLPs. The entities can provide management, control, asset protection and other benefits. While most, if not all, trusts include some type of investment provisions, typical LLC and FLP forms may not. If a financial planner is going to invest funds held by such an entity, they need to see if the documents have investment provisions.

The governance of an LLC is also something to note. If the LLC provides for a manager, the financial planner might take direction from them. But many LLCs don’t have a manager. Instead, decisions are made by the members. And this is where financial planners should exercise caution: they will need a clear chain of command and clear parameters for investment decisions.

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