The 4 pillars of a successful estate plan

Financial planning

Dec. 13, 2021

A customized, flexible trust means your wealth goes where you intend it to.

With the holiday season approaching, many topics will be up for discussion around your dining table. One subject that should be discussed among families but rarely is: wills and trusts. In fact, studies show that parents would rather discuss just about anything with their kids—even sex—instead of money. You can multiply that aversion when it comes to wills and trusts, according to Carolann Grieve, managing director of family governance for Truist’s Center for Family Legacy.

“The heads of a family may have a lot of fears surrounding their estate,” says Grieve. “Fear of end of life. Fear of losing control of their wealth.”

In addition, there are substantive fears about the heirs to an estate and how they will fare once they inherit wealth.

“The matriarch and/or patriarch may worry that their children will feel entitled, or that they will not achieve their full potential because of the wealth that they are going to receive down the road,” says Emily Haenselman, director of family education for Truist’s Center for Family Legacy. “Or they may feel that their beneficiaries and children would be taken advantage of because of the wealth that they stand to inherit.”

Because of these worries, many choose to put off estate planning—or at least the family discussions surrounding it—which may breed uncertainty, jealousy, and resentment among heirs.

To untangle some of these issues, it’s important to have healthy, candid discussions with your family about the estate planning process. You can invite your financial advisor to facilitate discussions as an impartial participant, or organize them as you like.

Second, it’s crucial to work with an estate planning professional to create a plan that will be successful for you. An estate plan consists of a will, financial and healthcare powers of attorney and often a revocable trust. The main difference between a will and a trust is that a will goes into effect after you’ve died, whereas a trust is effective immediately upon signing and funding. The revocable trust is sometimes called a “will substitute” because, like a will, it expressly defines your wishes for the distribution of your property after your death. But unlike a will, it can also delegate authority to someone to manage your assets during your lifetime, in the event you become incapacitated.

To be successful, your estate plan should:

• Be customized

• Be flexible

• Provide long-term asset protection for your heirs

• Be entrusted to the right person or entity

1. Customized for your family

The more complex your estate, the more desirable it is to have an estate plan that is customized to your particular goals and desires. Each estate is different, and so is each family. You want your will and trust to reflect your specific circumstances, according to Jacqueline Parks, Senior Wealth Strategist, Truist Wealth.

There is a difference, for example, between equity and equality, she explains. Perhaps you have four children. If you had no will, under state law, they would each inherit a 25% share of your estate, but that might not be what’s ‘fair’ for your family. Maybe one of your children borrowed a lot from you, or you provided much more financial support to them during your lifetime than you did for your other children. You might want to ‘equalize’ things by giving that child less than the others upon your death. Or, you might want them to get a bigger share, because you feel they need it more than your other children. There’s no rule that everybody has to be given an equal share. “What’s fair and equitable for your family is up to you,” Parks says.

2. Flexibility is built in

How you would like to divide and distribute your assets, and what makes the most sense for your family may change over your lifetime. That’s where the flexibility comes in. “I often recommend that my clients create a revocable trust,” says Parks. The revocable trust is amendable—you can always update it. However, Parks notes that once you die, it becomes irrevocable.

“For this reason,” says Parks, “if you want to build in flexibility, then you might design your revocable trust to include granting powers to other people who can make changes to the plan and protect assets for your heirs after you’re gone.” The trustee can be granted discretion to distribute assets among a pool of several people in accordance with their needs (such as your children and grandchildren). The beneficiaries themselves can be given what’s called “powers of appointment” that allow them to redirect how remaining trust assets will be distributed after their own death. The powers of appointment may be drafted very broadly (to any person or charity), very narrowly (for example, limited to your descendants), or anywhere in between. As the grantor or creator of the trust, the choice is yours.

Where there’s a will …

Some of us put it off. We don’t want to think about it. But we all must have a will (or a “pour-over will” if you have a trust). That’s because if you die with no will (“intestate” in legalese), like Howard Hughes and Prince, the probate court will need to determine who are your legal heirs, and distribute your assets among them in accordance with state laws. Typically, this would be your spouse and children/grandchildren (perhaps in proportions you would not prefer), but if you have neither a spouse nor descendants, then it could be your parents, siblings, nieces/nephews, cousins, etc. The bigger your estate, the more likely distant relatives will come forward to stake a claim.

Even with a will, you have to go through the probate process (tedious, open to the public, sometimes expensive). The will is a document where you identify who should inherit your assets and how much they get. The probate court oversees the process, determining what assets are included in your estate at your death, and dividing and distributing them in accordance with the terms of the will.

A revocable trust, like a will, identifies who should inherit your assets and how much, but it is managed privately by your trustee, without the additional expense and procedural requirements that come with oversight of the probate court.

3. Provides long-term asset protection

If you are a high-net-worth individual, or if you own a business (or both), one of the most appealing aspects of a trust is the long-term asset protection. According to Parks, by including certain provisions in a trust for your spouse and/or other heirs—you can protect the wealth from personal or business lawsuits, bankruptcy, and even divorce that could otherwise diminish the wealth they inherit after your death. This is accomplished by granting the trustee discretion to distribute the trust assets over the course of the beneficiary’s lifetime, rather than having mandatory distributions or granting the beneficiary an unrestricted power of withdrawal.

“I like to think of a trust as a bucket,” Parks says. “You’re putting assets—cash, securities, real estate, businesses, etc.—into the bucket. The trustee is the person holding the bucket with the power to pull funds out and distribute them to people. The trust agreement is essentially a contractual agreement between you and the trustee (and all successor trustees), in which you spell out to whom they may distribute the funds, and for which defined purposes. The trustee must follow the terms of the trust agreement. “If properly drafted, it can be an effective tool to protect the wealth from future creditor claims.”

4. Choosing the right trustee

When it comes to something personal like overseeing a will or trust, it’s understandable that many people opt for a family member—often someone within the legal or financial profession. But there are times when it may be wiser to choose a corporate trustee such as Truist. Here are some reasons why:

• You can avoid conflict within the family. “If you’re choosing a family member, it can impact family dynamics,” says Parks. Imagine one of your children needing to request funds from their sibling who is serving as a trustee. His management of the funds, and whether he is liberal or conservative with distributions, may put a strain on their relationship. This is true if the trustee is administering the trust terms correctly and even worse if they are not. A professional trustee can impartially administer the trust terms, keeping financial matters apart from personal matters and limiting the risk of future disputes among family members over the money.

• You’re not saving money. Administering a complex trust is a big job, and the trustee is entitled to be compensated for their work as a trustee. If your trustee, “Uncle Joe,” is a corporate attorney or CPA and is used to billing at a high hourly rate, consider that she may be entitled to charge the same rate for her services to your estate or trust. Nominating someone as an executor or trustee is not an honorary decision. There is a lot of work, responsibility, and even risk of personal liability.

• You need an entity that will stick around. Your trust may be designed to provide for your grandchildren, and even their heirs. No one individual that you designate will still be around to administer the trust in 100 years, but a corporate professional entity (or its legal successors) can continue well beyond the lifetimes of your family members.

• You need professional investment management. Trustees may be very aggressive and invest all the assets in something unsound. A professional trustee would have to follow state and contractual law and be a prudent investor.

Preparing your heirs

Your estate plan is your legacy. You want to have an open dialogue with your kids and heirs about your plans. Part of this means “having the conversations around why you’re doing what you’re doing with your wealth and the estate planning process, communicating a sense of seriousness around the estate plan, with an emphasis on stewarding the wealth,” according to Emily Haenselman of the Center for Family Legacy. “You want to create this understanding with the next generation that with this wealth comes a responsibility—and it’s more than just the wealth.”

Keep close track of your assets. Update your estate plan regularly. Keep it flexible, and make sure it provides the protection you need. In that way, the next generation—and even the one after—can be sure to do the same.

The Center for Family Legacy is here to help

For more information on how to structure healthy, transparent, and productive discussions around estate planning, read the white paper “Breaking the Silence” by Truist’s Center for Family Legacy.

Truist’s Center for Family Legacy works holistically to prepare high-net-worth families to pass on wealth, in areas that include financial education and family governance. For more information, read their white paper “25 Best Practices for Families.