Stan Purvis, CPA, CFP®, 6/3/2020
We all know that legal documents, at least for those of us who aren’t attorneys, can be complex and often overwhelming to digest. Your estate planning documents, for example, likely contain dozens of pages of unfamiliar jargon and language we simply seldom encounter – or would ever use ourselves – in day-to-day life. But these documents also happen to be something that just about everyone will need.
Indeed, estate and wealth transfer strategies are an incredibly important part of whole-life financial planning, as well as a topic that tends to raise weighty themes – family, legacy, causes. Unfortunately, what for many of us is the dense and complicated nature of our wealth transfer documents – while necessary – can also lead to a lack of clarity and understanding about what’s in them. That, in turn, may become an obstacle to implementation and thus a barrier between you and your goals.
One tool to help overcome this disconnect, and so potentially to enhance your wealth transfer plan’s effectiveness, is to create a simple, visual representation of where your assets will flow. Besides showing you exactly how your estate plan and documents will work to distribute your wealth, this exercise can also serve as a vehicle for successfully communicating your estate plans to your heirs, perhaps while still maintaining some degree of financial privacy.
An easy-to-reference, high-level illustration or diagram of your wealth transfer plan also comes with other benefits. It can facilitate deeper, more meaningful collaboration among your estate planning team – your wealth advisor, estate attorney and tax professional – so your plan best reflects your wishes. It can make the estate planning process more efficient. It can help you position the legal documents and strategies they employ in your wider approach. And it can increase your confidence in your plan by serving as a test run to ensure it meets your expectations and goals.
Due to the uniqueness and complexity of each client’s situation, an effective illustration can range from hand-drawn outline to more formal flow chart. In practice, a note pad or white board can be a useful tool for sketching the bones of a plan during a wealth transfer conversation and allows for immediate modifications.
At an essential level, an illustration or diagram of your wealth transfer plan should clearly recreate the concepts in your estate documents; show your overall estate plan strategy, its components, and its timing; cover asset and life insurance distributions to your spouse, children and grandchildren; and confirm the plan by simulating strategies and the value of assets.
Most wealth transfer plan illustrations historically have centered on and conveyed tax saving strategies, tax calculations and liquidity needs. That’s because the burden of estate taxes was a key catalyst to building such plans. However, tax law changes have increased lifetime estate exemptions to nearly $11.6 million for an individual and more than $23.1 million for a married couple. As a result, a great deal of wealth transfer planning has now shifted in focus to distribution and communication to heirs, and a chart or diagram can be an excellent mechanism for delineating an estate’s distribution for multiple generations.
For many, a suite of foundational estate documents will be enough to achieve their goals, and their wealth transfer plan will reflect that. A revocable living trust protects against incapacity, ensures privacy, and avoids costly, time-consuming probate. A pour-over will gathers any stray assets. A durable power of attorney gives someone you trust the ability to manage your finances if you can’t. And an advance healthcare directive allows another to make medical and end-of-life care decisions on your behalf. In any event, these documents will contain a number of roles – such as executor, agent and trustee – that you assign to family members, trusted friends and professionals, and which will translate over onto your chart or diagram.
Illustrating your wealth transfer plan can also help you see at a glance the assets that generally pass outside of your estate documents. In this way, certain types of asset ownership and retirement account, annuity and life insurance policy beneficiary designations can be viewed as part of a coordinated and tax-wise approach. Properly titling accounts and assets remains a crucial step in aligning your overall plan, and mapping it all out can make this readily apparent.
Just as your wealth transfer team works in a collaborative way to design and build your plan according to your values and goals, so too can its members contribute to and/or review an illustration of it. Your wealth advisor, who has a full-picture view of your personal, family and financial circumstances, acts as quarterback and will help with investment account ownership and beneficiary designations. Your estate attorney implements strategy and drafts your estate documents along with property ownership re-titling. Your CPA serves as a tax resource. And your insurance professional coordinates insurance policies and beneficiary designations.
In addition to a visual reference of your wealth transfer plan, you should also consider keeping a brief wealth transfer key facts summary that lists each document by name along with high-level points regarding important planning strategies, named roles (such as executor, agent, trustee) and beneficiaries, and the associated executed date. Both the illustration and key facts summary can help with ongoing clarity, especially as time passes since your last meeting with your estate planning attorney.
At the end of the day, the most important outcome of this exercise – besides a tool to communicate with family members about your goals and intentions – is a greater level of confidence in your wealth transfer plan and the legacy you envision leaving.
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