Your estate plan may represent a substantial investment of time, energy, emotion, and money. As satisfying as it was to complete, it’s important to remember that estate planning is a process, not a one-time event. Has it been a while since you created your trust? To be confident your trust is still relevant, and your estate plan is still realistic, consider these 10 key estate planning tips.
1. Acknowledge the passage of time
You may have drafted your estate plan or trust when your children were small — like your net worth. Now, in their 20s, an outright distribution of assets may feel like too much, too soon, especially if your net worth has also grown significantly since you set up your trust.
Trust tip: Consider the age and amount of distributions available to your children or other beneficiaries, when reevaluating your trust to be sure your gift will be a boon and not a burden.
2. Confirm that you have the right trustee
When choosing a trustee, it’s important to remember that serving as trustee can be a very difficult job, even a hardship, for a family member wading through cumbersome administrative responsibilities and processes. What’s more, it can be arduous, time-consuming, and potentially even risky for an inexperienced trustee. When revisiting your trust, ask yourself, “Is the trustee still willing and able to serve? Is someone else, who was too young at the time, now a better fit?”
Trust tip: Consider the advantages of pairing an experienced professional trustee with a family member to serve as co-trustees, or shifting the responsibility entirely outside the family, and into the hands of a professional to serve as sole trustee.
3. Understand who has access to sensitive information
Trust codes and documents often require notice and annual accountings to all qualified beneficiaries, including charities and others both inside, and outside of your family. That means that each beneficiary could be entitled to a copy of the trust agreement, a list of assets and values, and an accounting of the transactions throughout the year. Are you comfortable sharing all that information?
Trust tip: One possible way to maintain privacy is to give someone a bequest of a specific dollar amount, rather than making them a beneficiary of the trust.
4. Consider the impact of dollar versus percentage distributions
Though it’s not uncommon to leave a percentage of the value of an estate to a beneficiary, this requires a potentially costly valuation and appraisal of every asset, which can be difficult to obtain. Expenses can add up quickly if the assets will stay in trust and need to be valued multiple times. The challenge of this approach is that the balance sheet could increase or decrease significantly, requiring more frequent reviews of the plan.
Trust tip: Weigh the pros and cons of dollar versus percentage distributions when evaluating the impact on beneficiaries and the value of trust assets.
5. Anticipate changes in the economic environment
Over the last 15 years, interest rates declined and remained low for a very long time, then rose sharply. Because of this, trusts that distribute income paid significantly less than historically expected. At the same time, the equity markets performed well, so the value of the trust may have grown significantly to benefit remaindermen.
Trust tip: You may be able to avoid fluctuations with discretionary provisions for the trustee; a unitrust, which pays out a percentage of the entire market value of the trust; or by providing a fixed amount, adjusted annually for inflation.
6. Offer the trustee flexibility
Flexibility can allow your trustee to do what’s best for each situation at the time the request is made. For example, the housing market, interest rates, and market outlook all can vary significantly. They can each determine the best course of action when a beneficiary wants to purchase a home using trust funds.
Trust tip: Instead of trying to anticipate every possible situation that may come up, offer the trustee discretion to make the best decision for the beneficiary, based on their current circumstances.
7. Revisit charitable bequests and beneficiaries
It may have been some time since you designated charities you wish to support, and how the funds should be used, as either outright gifts, designated gifts, or endowments. If you designated a successor advisor for a donor-advised fund, did you discuss your intent with them? Are taxes an issue? Often, designating charity as beneficiary of your retirement plan can offer additional income tax savings. Instead of just including a list of charitable organizations you wish to support, consider specifying the amount going to each charity versus just dividing evenly among a list of charities.
Trust tip: Any large charitable bequest should be discussed with the charity ahead of your passing. Confirm the charity is still operating and still has a mission you support. Confirm your intentions for how the funds should be used, both with the charity and any successor advisor you’ve designated.
8. Confirm that outright distributions still make sense
As net worth grows, the value of that distribution could be significantly more than you anticipated. In addition, assets in trust may offer creditor protection. They could also offer protection if a beneficiary gets divorced and may allow families to avoid an uncomfortable conversation about a prenuptial agreement. Finally, a distribution may mean your assets lose generation skipping transfer tax (GST) exemption and could be taxed 40% in a beneficiary’s estate. This could be avoided by keeping in trust.
Trust tip: While outright distributions may seem simpler for beneficiaries that can manage the money well, confirm that this is still in their best interest. Also consider the tax consequences and plan accordingly.
9. Make administration as easy and cost-effective as possible
Make sure your plan still makes sense. Each trust requires a tax return and may have trustee fees that could get cumbersome if there are too many trusts, especially trusts that are too small. In addition to avoiding unnecessary valuation expense and complexity and unanticipated disclosure of information, make sure the trust administration is efficient. This could also help you avoid other problems like a trust with an expensive piece of real estate, but little liquidity to maintain it.
Trust tip: Apply your balance sheet to your estate plan and flow chart what each trust looks like. Avoid multiple trusts for each beneficiary where you can, and make sure the value of the trusts is worth the cost of administration.
10. Review other beneficiary designations
Life insurance policies, retirement accounts, pensions and other assets with a beneficiary designation fall outside the core estate plan, which includes trusts and wills. Recent rules have also changed the time in which retirement accounts pay out to beneficiaries, and all of this should be reviewed.
Trust tip: Careful planning can simplify administration and reduce taxes. Make sure beneficiary designations are taken into consideration as part of the whole plan and the numbers are reviewed as well.
The bottom line
The tax and legal environments change. Your net worth may change. Your marital status, family composition, and your beneficiaries’ circumstances may change. And your estate plan may need to change along with them to ensure that it still accomplishes your goals. We’ll never be able to predict change, but as you review your trust, remember: informed, intentional planning is almost always the clearest path to longevity.
