Utilizing a holistic approach to estate planning is essential, especially when deciding how property will be distributed and what tax consequences will follow. Advisors should work closely with clients to understand their testamentary goals and what they want to accomplish with their wealth during their lifetimes.
This holistic method emphasizes a careful review of each asset: how it is titled, its cost basis, when and to whom it will pass, whether it will transfer by will or by operation of law, which taxes apply, who will be responsible for those taxes and what funds will be used to pay them. With these facts in hand, an appropriate estate plan can be implemented. Equally important is an estate tax allocation provision to ensure the plan reflects the client’s intentions.
A will governs only so-called probate assets. If the client or attorney fails to include the other professionals who advise the client, the resulting estate plan can produce unintended or even harmful results. Attorneys, accountants and financial advisors who maintain ongoing communication after an estate plan is established can identify life changes that require updates to the plan.
When building an estate plan, it is vital to know how assets are owned—meaning the specific title and structure of ownership. The holistic review, which examines current ownership, anticipated appreciation or depreciation, income potential and related matters, gives the attorney the information needed to draft the most comprehensive plan. By identifying each component of the taxable estate, advisors form a clearer picture both of the estate today and of how it will appear when the documents are used to settle it.
Too often clients engage an attorney solely to prepare estate planning documents and neglect to inform their other advisors. As a result, the attorney may rely on limited information or the client’s incomplete recollection of assets, ownership structures and values. If documents are prepared based on inaccurate or partial information, the plan may fail to meet the client’s objectives. Clients may not fully understand taxable interests such as a general power of appointment, qualified terminable interest property, or incidents of ownership in life insurance. In some cases the client may be unaware that such interests even exist. A team approach increases the likelihood that the attorney will learn about the client’s full financial picture. Without that coordination, outcomes can produce disappointment or disputes when beneficiaries learn that some heirs received disproportionate benefits.
Disastrous results are unfortunately common when a holistic process is not followed. Professionals involved in estate planning should be encouraged to communicate with one another—not only with the client—when preparing any part of the plan. Although clients often watch fees and may hesitate to involve all advisors, the long-term benefits of comprehensive coordination typically outweigh the upfront costs.
Next month we will discuss the difference between probate and non-probate assets and explain the importance of estate tax allocation provisions.