Financial Planning | October 2024 Customizing your inheritance strategy

The trust or will you’ve put in place to secure your family’s well-being is the backbone of inheritance planning. But you should also keep in mind that estate planning documents shouldn’t be carved in stone.

“Something like the sudden death of a trustee or a beneficiary can easily prompt changes to wills and all types of trusts,” says Truist senior wealth strategist Aaron Thiel. “And when it does, it can immediately highlight the shortcomings of a set-it-and-forget-it approach to the legacy planning process.”

Whether you plan solely to leave an inheritance or are also considering a transfer of wealth while you’re still alive, building a legacy plan that’s successful hinges on designing an adaptable planning framework. Engineering flexibility and coordination into your planning helps you and your beneficiaries deal with unforeseen events that could occur both before and after your passing. “There are four key steps you can consider taking that will foster that adaptability and alignment,” says Thiel.

1. Broaden the authority of your trustees. Writing up strict standards for income distributions—like 3% a year for medical and education purposes—is often well meant. But when unforeseen events pop up, that framework can be too rigid to allow for adjustments and could complicate how you or your trustees manage inheritance.
   
   “Expanding the authority of a responsible trustee maintains parameters for income distributions and enables adjustments to meet a beneficiary’s changing circumstances,” says Thiel. For example, an unconditional 3% distribution may be suitable for a beneficiary who consistently exhibits maturity and a high level of self-discipline. But a younger or more impulsive beneficiary may benefit from a competent, empowered trustee providing a break on their spending until they’re conscientious enough to handle an unconditional distribution.
2. Implement powers of appointment and qualified disclaimers. In the case of irrevocable trusts, an expertly calibrated amount of rigidity brings benefits like asset protection, estate tax perks, and the mitigation of potential family disharmony. Implementing powers of appointment preserves those advantages while enabling future changes after you pass away in the distribution of assets without the need to alter the document. Qualified disclaimers also accomplish this by enabling beneficiaries to refuse the assets provided to them in the trust—which can be a strategic way to redistribute trust assets without altering the document.
   
   “Changes in federal and state tax laws are a major reason why applying some flexibility into your estate plan is important,” says Truist fiduciary resource director John Marold. “If your children already hold ample financial resources, they may be focused on enabling the next generation to use the trust assets. Your trust can permit your children to exercise a power of appointment or disclaimer to shift the benefit of the trust assets to the younger generation.”
3. Create regularly scheduled periods to update all inheritance documents. While unforeseen events are often what trigger planning improvements, consider scheduling regular reviews and updates of wills, trusts, and transferable retirement plans to help ensure your strategy’s ongoing success. Even if no major events in your personal life have occurred that necessitate changes, state laws, federal laws, and case laws that affect how you manage inheritance planning change almost daily.
   
   “At least every three years, you may want to consider sitting down and reviewing all inheritance documents with your wealth team and your legal and tax advisors,” says Thiel. “And if there have been major changes to tax laws recently, you’re going to want to contact your attorney, move up that review, and adjust your plan accordingly.”
4. Align your wealth strategy team. A crucial part of building a flexible inheritance plan is having a team of lawyers, accountants, wealth advisors, and retirement planners who help guide you through the more complex aspects of the process—and ensuring all of them are informed of changes in your life or in your goals. If your team isn’t on the same page, they’ll only go so far in helping craft an optimized inheritance strategy that achieves your legacy planning goals.“
   
   Each professional can take care of the technical aspects of the process, but unless you provide them with a clear, consistent understanding of your values and goals, they’re not going to be able to work in unison,” says Thiel. “Provide each member of your team with a family mission statement that lays out what those are in the clearest terms possible, or draft up letters of intent that succinctly state your guiding principles for inheritance planning and living wealth transfer.”

A fully optimized distribution of assets may also include transferring wealth ahead of your passing and creatively structuring assets to provide you with income while alive.

“From a financial security standpoint, the well-being of your heirs may depend on creating the most efficient tax outcomes possible,” says Marold. “By minimizing or avoiding the burden of income and estate taxes, actions like smart retirement plan management, up-to-date beneficiary designations, and the strategic use of taxable gifts help achieve that.”

If you anticipate leaving funds in a 401(k) to your beneficiaries, converting it to a Roth IRA can eliminate income tax on distributions withdrawn by your beneficiaries after you pass away. If a Roth conversion doesn’t fit your plans, a well-drafted and managed irrevocable life insurance trust (ILIT) can protect the insurance death benefit from both income and estate tax—though you’ll want professional guidance to implement this sophisticated strategy.

Providing gifts during your lifetime may have several benefits for optimizing your inheritance strategy. It can help your heirs with their finances, if they need it, while you’re still alive, and it enables you to see the impact your wealth can have on them. It may also be a way to reduce the value of your estate to avoid estate taxes after you pass, because the value of the assets, including any future growth, is removed from your estate’s worth.

Federal laws as of 2024 allow for gifts of up to $18,000 per person and per recipient every year without needing to file a gift return or pay gift tax. If you need to give more to someone during the year, you must file a gift tax return with the IRS. But you can ask for the gift to be counted against your lifetime gift tax exemption, which was $13.61 million as of 2024.

“There’s a delicate balance you need to strike, however,” Thiel says. “If you’re providing large one-time gifts or smaller annual gifts to multiple recipients and notice the assets in your portfolio are losing value due to market fluctuations, you’ll want to get with your wealth strategy team. They can run the additional analyses that help prevent your gifting strategy from jeopardizing the achievement or maintenance of your desired retirement lifestyle.”

“While running these types of analyses can’t perfectly safeguard your projected lifestyle all the way up through death, they can be a potentially useful first step in helping decrease that risk‑—providing insights that make it easier to harmonize your giving with your long-term goals,” Thiel notes.

Whether you’re considering annual gifts or looking to update your estate plan due to changes, it’s critical to plan ahead in order to increase the number of options available to you.

“A well-ordered estate plan makes managing clients’ affairs easier,” Marold says. “The easier it is, the more efficiently we can work, and that increases your possibility of achieving more tax-efficient outcomes and having happier beneficiaries.”