The removal of the estate and gift tax curtain is exposing what was always our clients’ true concern: how to provide for the ultimate well-being of their families. No longer will the estate planner focus solely on the intellectual puzzle of tax considerations.
To stay relevant, advisors need to adapt to a changing role, which may require abandoning some of their past assumptions. In other words, it’s time to leave the academic estate-planning tax tower and get down into the trenches to find out what’s really happening in our clients’ lives. We also need to create an atmosphere of trust with our clients, where they can be encouraged to identify, explore and articulate their concerns, which go far beyond tax planning. Many clients aren’t aware that they need to speak with us about these issues; others find it embarrassing or painful to tell us about them. We have a responsibility to educate our clients about the options available for the well-being of their family, which is a different role from tax planning or wealth accumulation.
We need to become aware of changes in our clients’ lives to create a modern estate plan that’s workable and addresses their concerns. Here are a few of the changes that are impacting estate and financial planning in the United States:1
• 40.8 percent of children are now born to a single parent;
• over 50 percent of U.S. households are now headed by a single individual;
• more people are choosing not to have children;
• non-traditional partnerships are increasing in number;
• 16.1 percent of U.S. households are now multi-generational, almost as high as in 1940;
• the number of grandparents who are raising their grandchildren continues to increase;
• the age at which children reach financial maturity continues to rise;
• 48 percent of middle-aged adults provided financial support in 2012 for a child over age 18;
• 21 percent of middle-aged adults provided financial support in 2012 to a parent over age 65, with most viewing it as their responsibility;
• 78 percent of middle-aged adults believe that they’ll be responsible for caring for an aging family member;
• the number of people who have a special needs diagnosis—either physical, mental or both—continues to grow;
• 19.8 percent of adults are treated annually for mental illness, and 4.6 percent of adults are diagnosed as having a serious mental illness;
• marriages involving a non-U.S. citizen are increasing;
• the amount that baby boomers have saved is insufficient for retirement; and
• there are serious questions about how much our government will be able to financially provide in the future.
With this list of factors, along with many others, what should the modern estate and financial plan address? Below are a just a few examples and ideas. Each individual client will have different circumstances, and each estate and financial planner will have her own techniques for crafting an estate and financial plan.
Health Care and Education Funds
It remains popular to create a trust for post-secondary education. What happens to that fund if the clients’ children don’t have children? Who receives distributions for education when it becomes more difficult to ascertain whom clients consider to be their children’s children? For example, do step-grandchildren count? What if traditional, ivy-covered institutions no longer are the place to go to obtain post-secondary education? What if going to college means a holographic professor in the home or a chip in the brain or something that we can’t envision? Twenty years ago, would we have predicted online classes becoming mainstream? What happens to a client’s priority for paying for post-secondary expenses if a grandchild suffers a closed-head injury or is given a diagnosis of bipolar disorder or autism and that grandchild’s immediate needs for assistance and health care become greater than his need for post-secondary education?
Do the provisions of the irrevocable trusts you’re drafting allow for these changing priorities? Do they take into account the expanded definitions of “family” that are occurring in our population? When drafting an education trust, consider adding provisions for distributions for the changing education and health care needs of the beneficiaries, such as:
Even though the Grantor’s original intent is that distributions be used primarily for Education [add a definition to define this term broadly], distributions may also be made for Medical Expenses [again, define this term broadly], taking into account that life circumstances and the needs of the beneficiary may change in ways that the Grantor is unable to foresee.
You may also want to include the ability to expand the class of beneficiaries beyond bloodline descendants or to remove an estranged bloodline family member. Flexibility becomes even more important with dynasty trusts. How can we presume to know what will be important to our clients and their beneficiaries 50 or 100 years from now? At the very least, we should have these discussions with our clients to stress the need for flexibility to keep pace with unforeseen future changes. It’s critical to include a trust protector provision or provide for the ability to amend an irrevocable trust, as well as language to protect the trust protector or an independent trustee if he uses the provisions to expand or change the class of beneficiaries or the purposes for distributions.
Family Living Arrangements
In many countries, families don’t have separate houses for each generation or for each member of each generation, as it’s a very expensive social model to sustain, both financially and societally. We’re already seeing the United States shift toward what’s more typical in many other developed countries: Children don’t move out until they get married, elders return to the home for the final years of their lives and members of the extended family move in and out as their needs change. This was the model in the United States before World War II. In the United States, we pride ourselves on our independence, but the financial and family costs may be too great to continue to afford a separate home for each individual of each generation. Children are moving back home (frequently with their own children), and homes are being built with mother-in-law apartments. This may become the routine, rather than the exception.
What happens to individuals our clients are now supporting when our client passes away? Should we expect the family who inherits to be as generous and understanding? Does the estate plan address any of these situations?
For example, what if family members think that their Aunt Susan took advantage of her gullible brother, and they want her out of the family home after his death—is the probate attorney forced to bring an eviction lawsuit and put Aunt Susan either out on the street or into another relative’s home?
Or, take single son Eddie, who’s been living in Mom’s home and “taking care of her,” which seemed like a great solution at the time. But it turns out the real story is that Eddie lost his job, his home and his spouse due to his alcoholism. Mom had to move to assisted living because Eddie didn’t really have the skills or the ability to see to Mom’s physical and mental needs. And, what happens now that Mom is no longer there, and Eddie refuses to leave the home?
What about daughter Sally, who gave up her career and did a wonderful job of taking care of Dad in his home, but now, after Dad’s death, can’t realistically get back into the work force and has given up her best income-earning years? And, what if Sally’s other siblings aren’t as supportive of Sally and her financial needs?
In addition, as international or multi-cultural marriages increase, the cultural expectations of other societies will continue to influence and change the needs of our clients. For example, John marries Sonia, who’s from a country with a more communal-based tradition, such as Mexico, Italy or India. Sonia may have expectations that she and John will financially and physically provide support to both of their immediate and extended family members.
Some clients express interest in maintaining the family home or vacation home as a multi-generation “family compound,” where children can stay with future spouses or long-term partners, perhaps raise children there, take care of parents as they age and keep the home in the family for generations to come. Is this a realistic goal? How do we draft trusts or limited liability companies with sufficient flexibility to be fair and to avoid litigation, allowing for the seamless transition to the next generation?
Children Not Financially Mature
We’ve all worked with clients who tell us about the financial and family success of their children Jennifer and Michael; we then ask, “what about Lynn?” and there’s the slightest of pauses or a sigh. It’s critical that we watch for these cues and then forge ahead with respectful, appropriate and compassionate questions to find out if there are special considerations that need to be addressed in the estate and financial plan. Is Lynn divorced, contrary to the clients’ expectations or religion; or is she addicted to heroin and they haven’t seen her for two years; or is she living in the clients’ home because she suffers from serious undiagnosed depression; or did she lose her job and just go through bankruptcy? There are so many unknown reasons why the clients didn’t immediately volunteer information about Lynn.
Now that we’ve encouraged our clients to fully express their concerns, we need to discuss how an inheritance would impact Lynn. Does she need a supplemental needs trust? Is it critical to avoid probate because it would be virtually impossible to locate her? Has Lynn been in and out of treatment, such that an inheritance could put her in a vulnerable situation with her own decisions as well as the individuals who might be in her life at that time? Does Lynn lack the experience in managing an inheritance because she’s never had money to manage? Is Lynn in an abusive marriage in which her husband would take all of the inheritance? The list of reasons is particular to each client.
We need to design a plan that pays particular attention to the needs of that beneficiary and works with the clients’ goals. That may require us to explore and discuss options with the clients and, possibly, think beyond traditional techniques. What’s realistic and what will work may not be something that we’ve designed before, but clients will still want our input and feedback.
There’s definitely no “one size fits all” when it comes to addressing the needs of these beneficiaries, but here are some of the considerations that may need to be addressed in the plan and discussed with the clients:
• What if Lynn’s situation improves in the future? What if Lynn’s situation worsens, predictably or unpredictably?
• How will Lynn react to being treated differently from other family members? How will the rest of the family react? Are these reactions important, or is it more important to address Lynn’s needs?
• Will Lynn’s life expectancy be impacted by the physical or mental diagnosis?
• Is it appropriate or possible for Lynn to be a sole or co-trustee of her inheritance?
• Should Lynn receive trust distributions on a totally discretionary basis, or would a regular stream of predictable payments be better?
• Who would, realistically, be willing to assume and wisely handle the responsibility of serving as a trustee for Lynn’s inheritance?
Designing the Plan
Unfortunately, our legal education may not have given us the skills we need to address these issues. In addition to knowing tax and trust laws, designing a successful modern estate plan requires being a good listener who’s both compassionate and non-judgmental. To continue to develop our ability to help our clients, I recommend reading about relationships, addictions, illnesses, aging and changing families.
To gain insight, volunteer with others who aren’t like you, pay attention to census and other statistical analyses and follow generational trends. We need to try to keep an open mind and be inquisitive of others and their situations and experiences. Finally, we need to take this information and make sure that it addresses our clients’ concerns. We’ll likely need to rethink how we write our documents. Doing so will require us to push beyond traditional borders and assumptions to design a modern estate plan that will address the concerns, as well as the changing priorities and goals, of our clients.2
1. These statistics are taken from articles published by the Pew Research Center, Social & Demographic Trends, including Kim Parker and Eileen Patter, “The Sandwich Generation: Rising Financial Burden for Middle-Aged Americans” (Jan. 30, 2013); “Young, Underemployed, and Optimistic: Coming of Age, Slowly, in a Tough Economy” (Feb. 9, 2012). See also statistics from “State Estimates of Adult Mental Illness,” National Survey on Drug Use and Health (May 31, 2012).
2. The opinions expressed in this article are the author’s personal points of view. The names of all clients have been changed.