What Financial Advisors Should Look for When Reviewing Client(s) Living Trusts

Mar 22, 2017
Estate Planning Living Trusts

Estate Planning Review

After practicing estate planning for almost 20 years, I've learned that having estate-planning documents doesn't always mean the estate planning goals are being accomplished. Usually, this is a result of not clarifying objectives before legal documents are drafted, or failing to review and update legal documents when significant life changes occur.

As a primer for Financial Planners seeking to address the estate planning objectives of their clients, here are five issues to keep in mind:

Unnecessary Probate Costs

Many experts claim that the average U.S. probate cost is 6 to 10 percent of the gross estate. This means it's a percent of the assets, regardless of what the liabilities are. This obviously creates unnecessary expenses, especially where mortgaged property is involved. The most common thing that leads to probate is the titling of non-retirement assets with either a single name or joint tenancy. With such titling, when the last account owner dies, typically those assets will go through probate.

Financial planners should be aware of such issues and make sure to point out potential titling problems. Be sure to refer the client to an attorney, who would then very likely draft a revocable living trust to make sure assets are properly re-titled.  Also, never assume that if a client has a revocable living trust their assets are properly titled in the name of the Trust.

Properly Titled Retirement Account Beneficiaries

This is an area that's often overlooked when an estate plan is drafted. According to a number of recent studies, less than 40 percent of retirement accounts use secondary beneficiaries. In this type of a situation, if the primary beneficiary pre-deceased the retirement plan owners and the beneficiaries weren't updated, those assets would be subject to probate before they would go to the heirs.

Also, there are at least five common types of beneficiaries that can be used on a retirement account:  a spouse, children, a charity, a trust or a non-family member. The rules for each group are different and; therefore, require altered strategies to minimize unnecessary costs and potentially wasted time for heirs.  Oddly, an especially common finding is naming minor children as contingent beneficiaries.  This can and does lead to disaster.  Consider naming your living trust as the contingent beneficiary in circumstances such as this.

Assets in Other States

Make sure all assets owned in other states are using the correct legal documents to ensure those assets will get to the right heirs in a timely manner. Trusts are usually essential in these cases to ensure your estate does not suffer through the time and expense of probate conducted in multiple states.

Unnecessary Death Tax

Current estate tax laws allow individuals $5.49 million (2017 – indexed for inflation in future years).   As such, only a small percentage of individuals and couples will become subject to this tax.   Even so, you should make sure that proper planning is done if needed in this area and you should also become familiar with “portability” so that you can properly advise and direct your surviving spouse client.

Partnership Between Planner and Attorney

Recognize the value in a strong partnership between a financial planner and an estate planning attorney.  It's vital that clients have not only a strong estate plan, but have their finances secured as well. Financial planners and advisors should work hand in hand with estate-planning attorneys in certain areas, as it's beneficial to the client's financial well-being.