It’s frustrating when we receive conflicting advice about a particular topic, and that is as true with estate planning as it is with anything else. Estate planning encompasses so many disciplines – legal, tax, financial – and you might even throw family psychology into the mix. Properly coordinating all of the moving parts requires having a team of professionals who are in regular communication with one another.
This was evident with a person I’ll refer to as “Betty.” Betty’s financial advisor didn’t communicate with her estate planning attorney or her CPA when he invested Betty’s mutual fund accounts into annuities and named the trust as the annuity recipient on Betty’s death. What transpired only came to light upon Betty’s passing. The annuity contract’s payout became subject to high income taxes because taxable income was trapped in testamentary (after death) trusts. Had the financial advisor been in coordination with Betty’s other professionals, this problem may have been avoided.
I can relay another incident involving a person I’ll refer to as “Frank.” Here, Frank’s attorney never coordinated the “funding” or transfer of his brokerage and bank accounts into his revocable living trust. When Frank died, all of those accounts were subject to probate. When his family inquired why a trust was prepared without funding, the attorney simply passed the buck on Frank producing a letter of direction to let his financial advisors and bankers know that he had a trust and that the accounts needed to be transferred into a trust.
Over the years I’ve come across many life insurance policies that had incorrect owner or beneficiary designations. The life insurance agent apparently never asked the client to involve his estate planning attorney in the transaction. When the client died and the life insurance became part of the client’s taxable estate for federal estate tax purposes, one child asked the CPA, “I thought that life insurance wasn’t taxable?”
The CPA’s response, “It’s not taxable as income! But if the life insurance policy’s ownership and beneficiary designations aren’t properly structured, then it may be taxable as part of the insured’s estate for federal estate tax purposes.”
As far as family psychology, I was only partially kidding when I mentioned that discipline needs to be a part of an estate plan. While psychologists are usually not a part of the estate planning process, it’s never a bad idea for you as the client to tell your estate planning attorney about family dynamics. One reason is because many estate plans “marry” individuals together financially, often for the rest of their lives.
An example of this is when a step-parent is the beneficiary of a marital trust for the remainder of her life, with her stepchildren as the ultimate recipients of the remainder of the trust assets upon her death. Every dollar that the stepfather consumes is one less dollar that step-children receive, and this continues on for the lifetime of the stepfather. Moreover, the investment strategy of the trust must balance the income needs of the current beneficiary with the growth needs for the future remainder beneficiaries to keep pace with inflation. This mix of competing economic interests can put the strain on even a good relationship, but consider what happens if and when the stepfather remarries, for example. Add that to the stress on whoever is serving as a trustee, particularly if that trustee is also one of the beneficiaries. In those instances the trustee must be able to intellectually separate his or her fiduciary duties as trustee from his or her own interest as a beneficiary.
To that end, even in families that do not share issues such as the blended family example above, siblings serving as a trustee/beneficiary may encounter psychological difficulties. We all grow up with our own baggage, and sometimes that baggage adversely affects sibling relationships. When those individuals who are serving as trustee work independently with a financial advisor on the trust accounts without sharing direction with the estate planning attorney, important legal and tax considerations may be overlooked.
The bottom line is that more communication is always better than less when dealing with an estate plan, whether during the grantors’ lifetimes, when they become disabled, or after death. When the right hand doesn’t know what the left hand is doing, unnecessary problems often arise.
The Sheppard Law Firm has its main in Fort Myers and also in Naples by appointment.
© 2017 Craig R. Hersch. Originally published in the Sanibel Island Sun.