Beyond the Traditional Estate Planning ‘Choices’

Expanding the options.

By Patricia M. Angus – Originally published on Wealth Management.com in March 2015.

Estate planners often advise clients that there are only three places where you can leave your assets at death: family, taxes and charity. It became popular to focus on this rule of thumb to encourage tax and charitable planning in the past when estate tax exemptions were lower and marginal rates higher. Today, however, client couples can pass more than $10 million free of estate tax, and so for many clients, estate taxes are no longer the estate planning drivers that they once were. This change is welcome relief for many clients, and even while income tax planning has become more important, it presents a chance to shift focus. Estate planners must become more creative as more of their clients have assets below the exemption amount. This shift presents a good opportunity to re-visit potential estate recipients and specifically determine if there are other potential “places” beyond the traditional three. We must now ask questions including: “Are there really only three places?” Asking these questions opens up the potential to become more creative with estate planning in ways that aren’t as tax-centric.

Family?

As they say, “blood is thicker than water,” and in most cases, family will still be the primary intended recipient of most client’s estate plans. Indeed, the presumption that family comes first is codified in most legal systems around the world. Outside the United States and other common law jurisdictions, individuals generally have very little choice other than to leave their estate to their family. Within the United States, the laws of intestacy and community property regimes provide that family members are the legal heirs but allow individuals to opt out of this default. In fact, laws in the United States provide the greatest leeway to proactively choose one’s heirs. It’s possible to expand beyond family, even though that’s not often done. In combination with higher estate tax exemptions, the legal system supports additional options for clients who’ve wanted to leave assets to non-family members but might have been reluctant to do so or, in many cases, advised against it for tax reasons by their advisors. Additional potential recipients would include a life partner to whom the client isn’t married, long-time aides or domestic employees and close friends, who in many cases are closer to the client than the client’s own family. The three- places system didn’t allow for this option. Merely asking the question, “Who else?” might lead to surprising, but meaningful, changes in clients’ estate plans.

Charity?

For several decades, there’s been a movement to integrate charitable considerations into estate planning discussions. Not only does it provide an opportunity for a client to continue supporting organizations that have played an important part in the client’s life, but also, it’s an opening into a discussion of meaning and purpose that defines legacy more broadly. By expanding the conversation around charity, an advisor can help craft a more tailored and purposeful estate plan for a client. In addition, it might prompt clients who don’t have family or others who they wish to include in a will to think more deeply about the charitable aspects of their plan. 

Finally, with the ongoing devolution of government services to the private sector, it provides an opportunity for a client to learn about and determine how they might support society’s needs. By asking, “Where else?” an advisor might enable deeper charitable planning.

Taxes?

While most advisors assume that clients wish to avoid taxes at all costs, this might not always be the case. Some clients are willing to forego tax savings if they can accomplish more important goals. Retention of assets within a family might be one reason. In many other cases, a client might choose to stay in, or move to, a higher tax jurisdiction to be near loved ones. Advisors who push a client to move, or support a client’s move to another state or country solely for tax reasons, might be doing a disservice. Probing with “What else?” might expose the human impact of tax driven planning.

It’s always nice to have a simple “model” and, for a long while, the three places seemed to help create a focal point for estate planning. Given the current tax reality and the complexity of clients’ lives, it would be a good time to revisit and explore how to become more creative and present more options to clients. The questions: “Who else?” “Where else?” and “What else?” might now replace the traditional three answers and result in more creative, meaningful estate plans.