Financial Literacy Gifts + Estate Planning

Ensure Your Estate Plan Has a Strong Foundation

BY Spectrum Wealth Management | Jan 24, 2022

What is your primary goal with estate planning? When asked, you may answer with this: “To pay as little tax as possible.” After the Tax Cuts and Jobs Act of 2017, less than 1 in 10,000 decedents’ estates, or 0.0001%, will owe federal estate taxes. Unless everything is left to charity, you should still address taxation, but the emphasis should always be on who your estate plan will benefit, and how it will be executed. 

While it can be a difficult conversation, your estate planner can help you determine how family dynamics could impact assets left to heirs. As one study concluded, advisors have prepared the assets for their clients’ heirs for decades. Now they need to focus on preparing the heirs for the assets.

When it comes to addressing family dynamics in estate planning, there are typically three key issues: 

1. The grantor’s desired use of the funds by the heirs

2. The heirs’ ability to comply with those desires

3. Protection from outside threats such as lawsuits, creditors, or divorce 

Do you have the confidence that your heirs will handle money responsibly? Many people are comfortable with the ability of their children. They believe their children were raised well, have a good education, and learned life lessons that will help them manage inherited wealth. In these situations, an outright disposition is often used in estate planning. 

Incentive Trusts

If a grantor is not fully confident in their heirs, so-called “incentive trust” language can be devised. As long as the provisions are within the realm of possibility and do not violate public policy, incentive trusts can guide heirs by creating a variety of motivations to perform certain desired behaviors or creating motivations to avoid behaviors. Examples have included refraining from alcohol or drug usage, gambling, uncontrolled spending, or achieving educational objectives. Using an experienced estate planning attorney will help you define these issues accurately to avoid violating public policy, rendering the clause unenforceable, or stating the information in a manner that is too general. These conversations can help you to discover and articulate your most important concerns.

Special Needs Trusts

Special needs trusts can be devised for disabled beneficiaries and minors too young to make their own financial decisions. Parents naturally want to protect those children who cannot protect themselves. Trusts with discretionary language in the hands of a trustee, perhaps aided by the aforementioned incentive trust provisions or a “letter of wishes” giving insight to the many concerns, may be the right way to structure an inheritance.

Philanthropic Trusts 

Philanthropy is a type of inheritance itself, often structured similarly, giving the beneficiary the gift of giving rather than the funds for personal use. This can allow the beneficiary to continue the family legacy, improve the world around them, maintain assets outside the threats of taxation and creditors, and pass them on to the next generation. 

Protection from External Threats

Many people are concerned about protecting beneficiaries and funds from external threats such as lawsuits, creditors, and divorce. Trusts often make sense to protect the assets of people in careers such as medicine or law, where lawsuits and claims against wealth may be more likely. Additionally, your success may mean that, while you may not have a taxable estate, your children may have one, which would increase the amount they would pass through to their children on top of their already taxable estate. Using an irrevocable trust, you can have the best of both worlds, available if needed and not part of the estate nor accessible to their creditors if they don’t. 

Historical and current family dynamics, personal values, and social issues significantly affect estate planning. Contact us today to connect with an advisor and discuss your unique circumstances that reach far beyond tax implications.

Spectrum Wealth Management, LLC is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. Additional information about Spectrum’s investment advisory services is found in Form ADV Part 2, which is available upon request. The information presented is for educational and illustrative purposes only and does not constitute tax, legal, or investment advice. Tax and legal counsel should be engaged before taking any action. The opinions expressed and material provided are for general information and should not be considered a solicitation for purchasing or selling any security.