An estate plan is a critical step in creating a financial plan for any individual or couple. The primary purpose of an estate plan is to determine how assets should be managed or distributed during life, and eventually after the death, of the trust creator and named beneficiaries. The topic of estate planning is one which must be discussed with family members — confronting the mortality of one or more of its members. While this can be a difficult subject for many, the sensitivity does not overshadow the importance of holding such conversations.
Even if the ultimate beneficiaries of the estate may not be comfortable talking about the death of a parent or grandparent, or if the estate owner is reluctant to share financial details, opening the lines of communication among generations is essential. Each family has to determine the degree to which openness about estate plans and associated mortality considerations fits their family's circumstances.
This paper explores the importance of communication about estate plans, the key issues that should be on the table, how to address privacy concerns and complexities related to less traditional family circumstances.
The importance of a legacy
Many invest significant time in developing an estate plan to be certain they have taken all necessary steps to properly distribute assets and limit the tax liability that may be incurred when an estate is passed on to beneficiaries. One of the most important reasons for a well-crafted estate plan is to leave a meaningful legacy that will endure well after the death of an individual or couple. The entire process is about much more than leaving financial assets to others. Perhaps most important, it is about the values of an individual or couple and how those should be carried forward when they are no longer able to provide guidance to their family members.
Some may decide that it is not important to put a great deal of time into planning for the disposition of their estate because they will no longer be around to see what happens with it. Yet, the decisions they make can have a tremendous impact on generations to come. This is why working with your attorney on the process of creating an estate plan and any documents associated with it such as wills and trusts, health care directives and powers of attorney, — should be one that is handled with great care.
Having your attorney create the legal documents is only a starting point. An estate plan and its lasting impact can be much more significant if lines of communication are opened between the current owners of assets and their intended beneficiaries. This means having open and frank discussions around many topics, not the least of which is the inevitable mortality of the current estate owners. The conversations can be challenging in some cases, but also extremely enlightening and ultimately, can provide peace-of-mind for both grantors and beneficiaries.
Opening the door
Because discussions with family members about financial matters can often be awkward and uncomfortable for those involved, many tend to shy away from such discussions. The hurdle may be even greater to overcome when it comes to talking about issues tied to an estate plan. By its nature, this topic must include the reality that death will come to one or more family members, creating a need to distribute assets.
Failure to communicate about these matters can be a disservice to all parties involved. For example, some family members may be left "in the dark" about aspects of family wealth that it would be to their benefit to understand. This increases the possibility that beneficiaries may be unprepared to manage the wealth that earlier generations worked hard to accumulate and preserve.
It is important to share concepts of financial and ethical responsibility in these discussions. Members of succeeding generations can be taught about not just family wealth, but about the full range of what may be possible and beneficial with the wealth they stand to inherit. Starting the communication process at an early age (with children or grandchildren) can help instill values about the wise use of money. The better prepared a beneficiary is about understanding the intent of an estate plan, will go far to foster their role as the stewards of the family's wealth.
Opening communication channels can make a significant difference. There is not one particular approach that works for every family. Some people have a legitimate concern about the level of detail they are willing to disclose regarding their wealth or the amount that beneficiaries may stand to inherit. Others may be willing to provide a great deal of information as a way to help guide future generations on handling money in a responsible way. Each person can determine the appropriate course of the discussion, but there is little question that opening the lines of communication is an important step in the estate planning process.
A starting point
Parents or grandparents who will be passing on wealth may wish to call family members together to discuss their estate plan and the distribution of their assets. They may also want to share their financial philosophies and how others might employ those philosophies. Typically, people who control the assets will be able to attract the interest of others if they want to initiate a conversation about their estates.
The conversation can occur in a single, wide-ranging discussion or in a series of meetings. While the subject of the death of elderly benefactors is certainly inferred as part of the process, the focus can be more on the future and what happens to the assets that are part of the estate. It is not necessary to share specific dollar amounts. It is an opportunity for parents or grandparents to provide some historical context about the family's wealth, share their guidance about how money should be used and voice any concerns they may have. It also gives younger generations a chance to ask questions and clarify their understanding about the intentions of the benefactors. Heirs can develop a sense of entitlement when no parameters are provided.
Alternately, if parents or grandparents have been reluctant to talk about their estate, it may be something that adult children need to initiate. This can become a major concern if it becomes apparent that one or both parents may be facing some mental challenges that could put a limit on their ability to make financial decisions in the near future, or are in poor health. An adult child may wish to mention that he or she just finished an estate plan for their own family, and thought it might be time for the parents to update their own. That approach may help to get the conversation started. Parents and grandparents should be informed about the value of opening up discussions regarding their legacy.
Putting it in "black and white"
In many cases, it may be best to discuss mortality issues and plans for asset distribution after an estate plan, including any trusts, have been established. It is a good opportunity to ensure that the estate plan is up to date and all documentation, including wills, trusts and beneficiary designations, are current.
However, estate owners should be open to the possibility that any subsequent discussions may, in and of themselves, lead to alterations in the structure of the estate plan. Conversations with children may be the impetus for updates to the plan. Factors that might not have been apparent at the time documents were initially drafted may come to light during family meetings. As a result, adjustments to existing documents may seem appropriate after issues and concerns have been put on the table.
One way that individuals who will be distributing assets from their estate can make their wishes or guidance known is to include a "statement of wealth transfer intent" in the documentation. This is often included at the beginning of a trust document. It can include information such as a history of the family, how wealth was accumulated and hopes for the family and grandchildren. This statement can serve as a foundation for why specific language was included in the trust. It is not legally binding, but can provide important direction for trustees and beneficiaries.
Other documentation that should be readily available, either in digital or printed form, is a list of important people and institutions to contact if a person has either become unable to handle his or her own affairs or passed away. This would include contact information for doctors, attorneys, accountants and financial professionals. It would also include a list of financial accounts, including banking and brokerage accounts, insurance and annuity policies and other related information. Specific details about what is held in these accounts do not necessarily need to be disclosed beforehand. However, it will help facilitate the estate disposition process to let key family members know where to find all of this critical information.
Conducting timely, targeted conversations
Before any conversations occur, it is wise to first determine the specific objectives that are to be achieved and if helpful, create an agenda for each family meeting or individual discussion. If children and grandchildren are involved, try to take into account their different personalities and capabilities, particularly when it comes to handling money. To the extent possible, an estate plan should account for these differences, and conversations should be tailored to address issues to each beneficiary in an appropriate and understandable way.
Who should be involved in these meetings? Again, this is a personal decision, but certainly adult children should be included, potentially with adult grandchildren. Even those in their teenage years might be appropriate for at least some discussion, particularly in providing financial guidance and teaching values about money. The decision about whether to include in-laws (those who have married into the family) is a personal one.
Timeliness is critical. These are conversations that are easy to delay, but it is important to face the reality that death or a disabling illness can occur without warning. Make estate planning a priority, and set a date to follow up your planning process with appropriate communications to all pertinent family members. Some families keep an open line of communication about family wealth by conducting frequent discussions. Others prefer to wait until later in life before first holding an estate planning discussion with their adult children.
Managing untraditional family situations
In some families, relationships may not be as clearly defined as they are with a family where there are two parents, still married, bequeathing assets to their own children and grandchildren. Many couples have been through one or more divorces. In other situations, the married couple might each have been married more than once, and may have children from a previous marriage. These types of situations add complexity to the estate planning process and make it even more important to open the lines of communication.
Where parents are divorced, it is important to understand the sensitive nature of the intra-family relationships, and those between former spouses who share children. Working with a corporate trustee who is able to provide objectivity may be valuable in this circumstance.
In a "mixed family" situation, where individuals re-marry and each has children from a previous marriage, it is important to determine equitable treatment of beneficiaries who may come from separate sides of the family. Once again, engaging in open and honest discussions among family members can help avoid future conflicts over an estate, or hard feelings about how assets are distributed after the death of the estate owners.
The risks of closing off communication
Providing clarity to beneficiaries regarding your intentions and addressing their expectations is important. Failing to do so can lead to conflicts among beneficiaries and the potential squandering of wealth that has taken great effort to accumulate and preserve.
While there are no hard and fast rules about how to manage the estate process, it is not unusual for problems to develop in circumstances where families did little communicating with beneficiaries. In the event that a parent dies unexpectedly, a child who inherits a large part of an estate may be ill-prepared to deal with a sudden financial windfall. That might not be the case if the child had received previous guidance or at least been made aware of what to expect when the estate is settled.
The challenges become more significant if a business or investment assets (such as real estate) are involved. For example, a business owner who intends to pass the business along to an heir needs to prepare that person to operate it. This will take time and significant communication between the parties.
Working with a corporate trustee
There are many reasons the grantor of a trust may want to consider working with a corporate trustee. It removes the burdensome and time-consuming tasks associated with the role of trustee from family members or other associates. In today's complex environment, it also puts more experienced financial expertise to work in helping to manage wealth and a legacy.
In terms of family communication, a trustee can often facilitate discussions and provide education on financial matters for younger, less experienced beneficiaries. A corporate trustee can also work as an objective resource among multiple beneficiaries to assure that the primary objectives of the grantor are met consistently over time. A benefit of enlisting a corporate trustee is that the organization will be in a position to help maintain the family heritage over generations. Professionals who provide these services can be a resource for both the grantor and beneficiaries as the estate plan is created and updated and ultimately as assets are distributed. A corporate fiduciary can also play an important role in helping beneficiaries work towards key investment, retirement and estate planning goals with the wealth they inherit.
Estate planning is typically a very personal matter that gives individuals and couples an opportunity to determine the type of legacy they wish to leave after their passing. Yet, as personal as many of the decisions may be, the reality is that the estate's beneficiaries will be responsible for carrying out the legacy. Therefore, it makes sense to communicate intentions regularly and with clarity to help protect and implement the legacy as you have intended. While aspects of the discussion, from details about financial matters to the reality of the mortality of parents and grandparents can be uncomfortable, the alternative may be less desirable. A failure to effectively communicate about legacy intentions may leave beneficiaries in the dark and potentially unprepared to manage their inheritance in the most effective and intended way.
U.S. Bank can work with you to help facilitate conversations between family members and provide education and guidance for grantors and beneficiaries. Other professionals, such as tax accountants and attorneys, should be included in the process.
Senior Vice President, Regional Trust Manager, U.S. Bank Wealth Management Group, Fiduciary Services
Nancy Brackmann, CFP®, CTFA
Vice President, Senior Trust Officer, The Private Client Reserve of U.S. Bank
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U.S. Bank and its representatives do not provide tax or legal advice. Each individual's tax and financial situation is unique. Individuals should consult their tax and/or legal advisor for advice and information concerning their particular situation.
The information provided represents the opinion of U.S. Bank and is not intended to be a forecast of future events or guarantee of future results. This information is not intended to serve as a recommendation or solicitation for the purchase or sale of any particular product or service. It does not constitute advice and is issued without regard to any particular objective or the financial situation of any particular individual. These views are subject to change at any time based upon market or other conditions and are current as of the date indicated on these materials.
© 2016 U.S. Bank N.A. (3/16)