Sitting down with an estate planning attorney means investing a significant amount of time and energy learning technical legal and tax strategies, options and implications. The initial meetings will outline the value of trusts, how much you can give and what vehicles can protect assets from creditors and shelter them for heirs. These are important issues worthy of thoughtful consideration; however, at times, “estate planning fatigue” sets in, and a larger point is left unstated and unaddressed: The estate plan will mature at an unknown and unknowable moment in the future. Because it is virtually impossible to know with certainty the point at which an estate plan will go into effect, it is impossible to know the exact legal and tax landscape in which the plan will need to operate. Further, we cannot predict the health, well-being or financial position of family members or unborn descendants who may benefit from the vehicles set up in the estate plan. For these reasons, tax and trusts are mere pieces of a well-rounded plan. It is just as, if not more, important that the legal documents create a plan that is flexible enough to reflect your values and accomplish your goals both now and into the future. In other words, the plan must be resilient.
Be Tax-Aware, Not Tax-Driven
A resilient estate plan should be informed, but not necessarily controlled, by tax planning.
The federal estate tax rate is currently at 40%, with an exemption of $12.92 million per individual transferor. The gift and generation-skipping transfer tax rates and exemptions are the same. In some states, a separate state-level estate tax can boost the total tax to over 50% on transfers greater than $12.92 million. Absent legislative change (which is never a given), the federal exemption for each of these taxes is scheduled to decrease to approximately $5 million, indexed for inflation, on January 1, 2026. Clearly, tax efficiency is of major importance in an estate plan.
Tax efficiency in estate planning has traditionally meant making large gifts during life, leaving everything above your remaining exemption amount to your surviving spouse at death and holding assets in trust, rather than distributing them outright. However, there are many reasons why traditional approaches to tax efficiency might not make sense for your situation. For example, if your plan contemplates the transfer of assets to grandchildren and more remote descendants, it is impossible to know how traditional planning may affect these individuals and how the plan might work for (or against) them. Layering on charitable intent, both yours and that of future generations, adds complexity.
Build Flexibility into Your Plan
The future is unknown. Premature death, disability, natural disasters, significant financial success, addiction, divorce and tax law changes are all possible future events, yet traditional tax planning assumes all families share the same future, goals and values. While advanced estate tax planning is a complex subject matter, less than 3% of failed wealth transfers are due to poor investment, legal or tax advice, according to a study by The Williams Group. The vast majority of failures in this area, where failure is defined as a loss of family control over the wealth, are due to more nuanced causes, like the breakdown of family communication and trust, inadequately prepared heirs and lack of established family mission, values and goals. For these reasons, where wealth preservation is a goal, it is crucial to construct an estate plan that enables you and your family to adjust as circumstances change. Without flexibility, even the most technically sound estate plan may become obsolete in the face of reality.
A resilient estate plan may include some or all of the following features:
Discretionary (rather than mandatory) distributions. A common strategy where an estate plan contains trusts is to direct the trustee to pay some or all of the trust estate to a beneficiary when that beneficiary reaches a certain age or ages (for example, one-third at age 30, half at age 35 and the balance at age 40). A more flexible approach is to provide that the trustee may make a distribution to the beneficiary at any time, for any reason, taking into account the beneficiary’s other financial resources, goals and life circumstances at the relevant time. This way, if, for example, a beneficiary is going through a divorce at age 39, the trustee is not required to make a distribution into a personal account that may end up outside the immediate family. Giving a trustee this much control over a trust fund means that selection of the individual or institution is critical. More to come on that.
Grantor trusts, with the ability to “toggle” the grantor status. Another common estate planning strategy is to create trusts where the settlor, or grantor, of the trust is required to pay the trust’s income tax bill. This is a very tax-efficient strategy because it allows the trust fund to grow income tax-free. This allows for the transfer of assets from one generation to the next without triggering a gift tax or using up exemption. However, some grantors may decide that they no longer want to be on the hook for a tax bill generated by a trust of which they are not a beneficiary. This could happen because the grantor has spent down her personal assets, because she feels that the beneficiaries of the trust have been given enough or for any number of other reasons. Whatever the reason or change in circumstances, the ability to turn off this tax treatment, thus making the trust responsible for payment of its own income taxes, is one way to increase the plan’s flexibility.
Spousal access trusts. Under current law, spouses may transfer an unlimited amount to each other. This “marital deduction” from estate and gift tax merely recognizes a reality of everyday life: Spouses are constantly making transfers to and from individual and joint accounts, changing the title on deeds and transacting together and between one another. The Internal Revenue Service (IRS) has decided that these are not taxable transfers worthy of reporting. However, when an individual makes a significant transfer to a non-spouse beneficiary, the IRS looks to account for and, for transfers over $12.92 million, tax those transfers. For this reason, a common tax-efficient strategy is to transfer up to $12.92 million to an irrevocable trust for a non-spouse beneficiary or beneficiaries (typically, descendants). If the transferor falls upon hard times and can no longer support herself, that $12.92 million transfer is truly irrevocable. Her children and grandchildren may be wealthier than her (and they may not be interested in sharing)! If, however, her spouse was included as a permissible trust beneficiary, there would be an escape hatch of sorts where the trustee could return assets to the grantor through a distribution to her spouse. This is certainly not the most tax-efficient estate plan, since assets that were formerly removed from the grantor’s taxable estate would be returned to her spouse, nor is it an airtight method of “saving” a transfer that was too large. (What if, for example, the transferor divorces the spouse, or the spouse predeceases her?1) The future is unknowable! But the peace of mind in knowing that there could be a way to get back assets in the event of a change in financial circumstances can be incredibly valuable.
Precatory (that is, expressing a wish or intention) rather than mandatory language within trusts; letters of intent. Traditional estate plans would sometimes contain carrots for good behavior; for example, for every dollar of income the beneficiary earns, the trustee shall make a “matching” distribution from the trust fund. They also occasionally included sticks in order to discourage “bad” behavior – for example, distributions for uses other than education may be made only once the beneficiary has earned a bachelor’s degree. The values these types of restrictions seek to encourage are objectively good – earning one’s own income is rewarded (by a dollar-for-dollar increase in distributions from the trust), and education is important. However, what about a brother and sister, one of whom is a teacher with a low income (but contributing significantly to improvement of local education) and the other a corporate attorney with a high income who has no time to spend it? Were the grantor alive, she might say that these two high-achieving siblings should receive equal distributions, or even that the teacher should receive more, in order to supplement a salary that is not enough to make ends meet in a high-cost city. If the restrictive language is built into the actual trust agreement – the written document signed by the grantor and the trustee – the trustee may have a difficult time modifying the distribution standard. If, however, the trust agreement provides that the trustee may make distributions at any time for any reason, then the trustee is able to make decisions about the use of trust funds using facts the grantor did not have at the time she signed the trust. This again points to the importance of choosing a fiduciary who knows you and your family well and whose judgment you trust. Even more valuable would be a letter from you to that fiduciary explaining in nonbinding (precatory) words what you envision the funds should be used for and providing general guardrails for distributions. For example, “distributions should be made to support entrepreneurial behavior, but requests for this type of distribution should be supported by a budget and business plan.”
Select Your Fiduciary with Care
To develop a resilient estate plan, carefully consider who will act as your fiduciary. Given the duties associated with the position – and in the case of a trustee, the level of discretion connected to a flexible, long-term trust – the choice of who will serve in this role, and the amount of information you provide to this individual or institution at the time you create and execute the plan, might be the most important decision you will make throughout the estate planning process.
First, you should understand what your fiduciary’s responsibilities will be. There are many professional and procedural jobs a fiduciary must complete in addition to the perhaps daunting task of managing family dynamics and requests for distributions. Every state has a different set of laws, but in each state, failing to fulfill one’s fiduciary duties can result in a lawsuit and personal liability.
A fiduciary must review and understand the document by which she is appointed – a last will and testament or a trust agreement. This will likely require some guidance from an attorney in the case of an individual fiduciary. The fiduciary must also identify and understand the assets of the trust or estate because she will be responsible for managing those assets, which may be as simple as hiring a financial advisor to invest cash or as complicated as running an operating business until a competent successor is identified. Therefore, it is important to consider what your assets are and who would be best positioned to manage them in your absence. Filing tax returns and preparing accountings of trust and estate activity also fall to the fiduciary and will likely require professional assistance.
On the “softer” side, a trustee is required to act in the best interests of the beneficiaries, to be impartial to the extent there are conflicting interests among beneficiaries and to communicate with the beneficiaries. These duties become particularly relevant where a trustee has authority to make discretionary distributions to one or more beneficiaries. Beneficiaries may request distributions, fight among each other about distributions or have differing opinions on how trust assets should be invested – and the trustee may find herself in the middle of these disagreements.
People often name family members as fiduciaries because it is a common choice and because those are the people we trust most; however, in selecting a fiduciary, it is important to consider not only the professional responsibility and liability associated with the position, but also the dynamic you want the trustee to have with the beneficiaries. It may be a family member, or it may be a corporate fiduciary that will not face personal or emotional angst as a result of its objective decisions. One option that represents a middle ground is to give a family member you trust the power to remove and replace a corporate trustee. Alternatively, you could name a family member and a corporate fiduciary to serve as co-trustees. Whatever your decision, it is good practice to communicate with the person or entity you wish to name to ensure that everyone is on the same page about the role and responsibility associated with the job, as well as the values you wish to pass on to future generations through your estate plan.
Identify Your Values
A hallmark of an enduring estate plan is that it is built around core values – the “why” behind estate planning decisions.
A good place to begin is with a family timeline, identifying how values have shaped your family’s history and listing and prioritizing the items that truly matter to you. What recurring values-based messages did you hear growing up? What messages do you want to pass along to the next generation? Where do you spend your time and your financial capital?
Next, start building a plan around those values. For example, if you want your kids to be philanthropic, it is best not to simply leave them a pool of charitable assets and expect them to operate a foundation without any prior guidance. In their younger years, communicate about how and why you give, and include them in your site visits and charitable giving decisions. With this approach, your values will be instilled in the next generation organically. They may take an interest in a different type of charity, but they will carry on your legacy of philanthropy.
Communicate with Your Family
The estate planning process involves not only what goes into the plan, but what you do with it once it is complete. In this regard, communication with family members is vital. In fact, without effective, thoughtful communication, your family risks losing control of its wealth, which happens to approximately 70% of families by the second generation, according to The Williams Group’s study referenced earlier. In 97% of those cases, the loss of control related to a lack of communication. Meanwhile, as noted, poor legal, tax and/or investment advice was to blame in just 3% of cases.
You can hedge against this risk of loss with a robust communication plan that establishes the family’s mission, builds and retains trust and adequately prepares heirs to become responsible stewards of the family’s wealth.
Start with storytelling. What family stories have shaped your values? Share these stories with your children and other family members to honor the experiences of those who came before.
Create family traditions. Traditions are a way to bring your values to life, which helps the next generation carry them into the future.
Choose the best time to share. Choose a time when family members are receptive and your stories will be heard.
Record your stories. As you think about and share the stories that have influenced your values, record them in writing or video. This process helps to preserve past experiences and formative moments for your descendants.
For more on the criticality of intergenerational communication around wealth values, read “Love and Money: Why Communicating Values Matter.”
Successful estate planning is about more than tax efficiency. One way to mitigate the unpredictable nature of the future is to create a resilient plan that meets your family’s needs through succeeding generations. You can achieve this by embracing flexibility, centering your plan on your values and communicating with your fiduciaries and your family.
We believe the following six guiding principles can help families create life-affirming, enduring, effective wealth plans:
For more details, read “What We Believe: Principles of Successful Wealth Planning."
1 In 2022, Florida enacted a law providing that after the death of the spouse-beneficiary of a spousal access trust, the original spouse-grantor may benefit from the trust. This is a novel concept, and it remains to be seen how such trusts will be treated for federal tax purposes.
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