A “Better” Guide to Estate Plan Funding: Part 1
Introducing a new course series on a modern approach to estate planning
Series Index
Part 1: Intro (this article)
Video – Start Here
Table of Contents
Intro
…starting with funding in mind isn’t just a different way of doing things. It is essential to the estate planning process for practically every client.
The internet is full of content on the basics of estate planning. But, a lot of the education out there falls short when it comes to being actionable or relevant in the modern estate planning environment.
Yes, clients need documents. But, whether you are the first or the 1,000th person to tell clients they need a will/revocable trust, powers of attorney, and a living will, these documents do not make a complete plan.
Why? Because, more than ever, estate plans require funding.
However, funding is an undefined and loaded term. It is often used for (sometimes negative) marketing to highlight the shortcomings of services provided by attorneys and financial advisors. It seems necessary, yet is frustrating for professionals who push clients to fund estate plans after the ink dries on their documents – if documents are actually prepared and/or executed.
And most importantly, the funding gap is not a reflection of the shortcomings of attorneys or advisors. Although modern estate planning is completely reliant on funding, the financial advisor and attorney are often only capable of handling select parts of funding. There seem to be three things in estate planning that are certain: (1) death, (2) taxes, and (3) the criticism between advisors and attorneys about incomplete efforts or guidance in estate plan funding.
Yet, this criticism ignores the scope of what is within the domain of wealth transfer professionals. For example, an attorney may not be able to change a beneficiary designation. A financial advisor may not be able to draft and record a deed transferring a residence to a trust. The best thing the advisor and attorney can do is team up, then divide and conquer. First, however, they must be on the same page – not only with respect to the client’s specific needs, but also with respect to basic principles of estate planning within their respective domains of funding.
This is why I have developed a new content series. Estate planning “basics” falls short, because it is based on principles that are no longer complete. Current education does not always honor what is in the wheelhouse of the advisor, versus what is in the wheelhouse of the attorney. And, in this vein, what is often passed off as “basics” leaves the most critical element – funding – to the end (assuming it is covered at all).
What if, however, we turn this dynamic on its head? Why not start with funding in mind?
As will be presented in this course, starting with funding in mind isn’t just a different way of doing things. It is essential to the estate planning process for practically every client. And, few if any thought leaders appear to have captured funding in a multi-disciplinary way.
This course represents my attempt to do so.
Note, however, that there are shortcomings in what I can effectively cover. For example, funding is often dependent on state law principles, and I cannot effectively teach differences in the laws of all 50 states. Asset custodians vary in their processes and procedures as well, and I cannot teach you their policies. What I can do, however, is give you the common law framework to do your state-specific and custodian-specific homework – depending on which is in your domain. And, importantly, I can give you the knowledge to become an effective collaborator and issue-spotter – no matter which role you play in the estate planning process.
Without further ado, welcome to a “better” guide to estate plan funding.
The Course
The video above, and this article, represent a free preview. The balance of the course will be available for paid subscribers to this newsletter. I will aim to publish a new installment every one or two weeks, with some occasional breaks, but at the end I will have the entire course available for purchase for a flat fee.
Note, however, that this course is provided for educational purposes only and does not substitute for legal or tax advice. I am providing this course and content for an audience of wealth transfer professionals who assist, or aspire to assist, clients with their estate planning needs. If you are an individual in need of assistance for yourself or your family, please DO NOT subscribe to or purchase the course.
Of course, the success of this course relies on your feedback. If you think this content can benefit your peers, I encourage you to share it.
The Problem
To supplement the video above, the following discussion sets a foundation for what we will later discuss in this series.
Traditional estate planning focused on the last will and testament as the cornerstone document. A validly-executed will, with a residuary clause, served as an effective backstop to capture all of an individual’s assets. By using legal terms for classes of property or classes of recipients, an individual could avoid the need to identify and direct each of their individual assets within their will. This created a streamlined method of estate planning.
And, if an individual died without a valid will, intestacy statutes often created this backstop as well. While an individual would lose control of the direction of their property or classes of property, they would still have the security of knowing that recipients for all property would be determined under state law as long as living heirs at law could be found.
Whichever backstop applied – whether a will, or intestacy – required the probate process. While the complexity of probate varies by state, and while probate has benefits we will later discuss, it is often criticized for three key shortcomings:
1. It can be costly, requiring the payment of attorneys’ fees, executor’s fees or commissions, and other administrative expenses.
2. It can take a long time – at least six months, and often more.
3. It is a public process, meaning that third parties can often access probate records (and possibly a copy of the will) through the court clerk.
However, there is a new category of assets – called nonprobate assets – which completely bypass this traditional way of planning, directing, and administering the estate. In many modern cases, the bulk of a client’s wealth may consist of nonprobate assets – rendering traditional estate planning less effective.
Why does this matter? The primary concern is that nonprobate assets override the terms of the will or intestacy statutes. Although probate is avoided, planning for nonprobate assets brings a new set of headaches. (As an FYI, revocable trusts will later come into play in this discussion, but usually revocable trusts are still accompanied by a pourover will.)
What are nonprobate assets? While the list is incomplete, they often consist of:
Assets transferred by a beneficiary, POD, or TOD designation to any individual or trust (other than the estate);
Jointly-owned assets with rights of survivorship;
Community property, with respect to at least one-half of each community property asset;
Assets held in trusts at the time of the trust settlor’s death, or transferred to the trust by beneficiary/POD/TOD designation(s) as a result of the trust settlor’s death; and
Assets for which title is split into a term or life interest, and a remainder interest.
The big secret of modern estate planning is that each individual has two, parallel estate plans – nonprobate property, and probate property. While the probate plan can be easily planned for or changed through a will that applies to all property within the probate bucket, planning for the nonprobate plan is not as simple as the creation or amendment of a document – at least not without intentional upfront planning. Both the creation of the nonprobate plan, and changes to this plan, may require changes with respect to each and every individual asset.
This can be unwieldy, and it increases the risk that a mistake will be made or that the client’s wishes will not be completely implemented. This can lead to bad feelings among heirs at best, and costly litigation at worst – the latter of which nullifies the benefits of avoiding probate to begin with.
So, how do we effectively plan around these two separate but parallel estate plans – nonprobate property and probate property – while making it simpler to change not just one, but both plans, on an omnibus basis (instead of an asset-by-asset basis)?
This is where funding comes into play. And since the nonprobate bucket (1) overrides the estate planning documents and (2) requires specific asset-based planning, it makes sense to start with funding and strategies relating thereto.
Conclusion
This course will examine many of the important benefits and risks that come into play in this funding process. You will come away with a better toolset to examine these parallel estate plans, and map outcomes for clients and prospects. You will also have a better rubric for examining the benefits and risks of asset-specific titling and beneficiary designation concerns.
Importantly, this course represents the evolution of perhaps my greatest failure as a content creator. About one year ago, I promised a course on the basics of estate planning. But, I failed to deliver, as I knew the course was incomplete yet could not figure out why. Ultimately, I realized that my proposed course – along with most courses in this vein – were incomplete because they glossed over funding. Modern estate planning requires that funding be placed front and center, but the basics I was trying to teach focused on traditional approaches which did not need to focus on funding.
Importantly, as we will find out, there are elements of each parallel plan – nonprobate and probate – that are better suited for attorneys, or advisors, respectively. It is very difficult for an advisor or attorney to go it alone and completely fund an estate plan. Reliance on each other is paramount for complete, modern estate planning – regardless of what the isolationist zeitgeist of various estate tech and marketing vendors may tell you.
So, if you are ready to forge ahead with more actionable, up-to-date knowledge in estate planning, please consider subscribing. You can do so by clicking the button below.