2 Key Steps to Successful Estate Planning

Bob Carlson

Some of the most important work on your estate plan doesn’t take place in the lawyer’s office. It doesn’t even involve the details of the will, trusts, probate, powers of attorney, and the rest of the cornucopia of estate planning documents and strategies.

Often the ultimate goal in estate planning is to ensure the wealth you accumulated, however much or little, lasts for a while and be used to improve the lives of at least one more generation of your family. You also would like the wealth transfer to increase family unity and harmony.

Unfortunately, wealth is sustained only in a minority of cases. Also, the process of passing on the wealth often creates problems within the family. Longtime disagreements are exacerbated and conflicts about how to manage and spend the wealth further strain relationships.

You can help avoid these problems, but it requires taking some steps in addition to the traditional estate planning actions.

The first step is to consider how you want the estate divided.

Estate planners have a mantra that the three ways of dividing an estate are fairly, equally, or equitably.

Estate owners often struggle with this issue because they know their children aren’t equally responsible, don’t have equal prospects or talents, and probably received different levels of help from their parents over the years. Yet, the parents feel obligated to divide the estate equally.

A better solution for many estates, especially those with above average value, is to use all three ways to divide the estate. Here’s an example.

Max Profits decides he will provide for each of his children through graduate school or as far as each chooses to go. Each child can decide how much education to pursue and select the schools. If a child wanted to attend a trade school or a community college or be supported through an apprenticeship, Max would agree.

Th s is known as the “fair” allocation of wealth. Though it is likely different amounts will be spent on each child, each child had the same opportunity and was able to maximize his or her own talents and interests.

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Other types of spending also merit fair distributions. In addition to education, Max should consider whether he wants to offer help with first homes, business start-ups, travel, medical care and childcare.

Usually the offer of these fair gift applies only during the parents’ lifetimes. There isn’t a separate fund reserved in the estate to be spent on these needs after one or both parents die.

Also, there might be a dollar limit or a use-it-or-lose-it deadline (or both) so the parents can plan. The education or first-home purchase might have to be concluded by the time each child reaches a certain age, or the support no longer is automatically available. Or a certain amount of money might be made available for travel of the child’s choice, but only until a certain date. Often, fair allocations are available only during the parents’ working years.

After the fair allocations, Max then divides the final estate into two portions, which usually aren’t equal to each other.

One portion of the estate is for equitable giving to people Max believes helped him in life or earned it in some other way.

Some people make equitable distributions from their estates to key employees, or sometimes to all employees. A child who helped build the business more than the others, helped care for an ailing parent or grandparent, or made some other extra contribution might receive an equitable distribution.

Sometimes an equitable distribution is a cash payment. Other times it is the bequest of a particular piece of property or a share of the business. The appropriate form often depends on the reason for the bequest.

The rest of the estate is split equally among Max’s children. That doesn’t mean each child has equal joint ownership of each asset. It does mean that each receives approximately equal value from the estate.

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The blended distribution approach makes sense because each type of bequest has a different purpose. The fairness gift are primarily to motivate the children and give them opportunities. The equitable gifts are to reward people, whether they are children, grandchildren, or have other relationships with you. The equal gifts are to increase financial security for your children and perhaps future generations.

Deciding how to allocate the estate is the first step of planning. For this or any other estate plan to work, the children and any other heirs need to be informed of the plan early. They need to be prepared to handle the assets. That involves regular communication and education. The best estate plan on paper doesn’t work if the assets and plan are dumped onto the children without any preparation.

Most people don’t involve their children in financial matters early enough. Parents should be talking with their children about money from an early age, but it’s never too late to start.

First, you need to be clear what the wealth means to you and what its purpose is. They also should know in general what’s important to you and what you value.

Finally, you need to consider how you communicate and how others in your family communicate. Everyone has a different communications style. When the styles don’t mesh and no one tries to modify his or her style, there is no communication. Consider how your family members communicate and decide if your style can be modified during family get-togethers to improve communication.

The family should spend time together regularly. When the family is spread around the country, there might be an annual get-together of the whole family, and then smaller gatherings as they can be arranged. These should be social gatherings with no agenda related to money or estate planning, though they can be discussed if the topics arise naturally. Older family members should take opportunities to pass on family stories, values and messages. The children are never too young or too old to learn these things. There also should be an effort to hear what’s important to the other family members.

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Once communication is improved, there can be more formal, planned gatherings periodically to discuss the family wealth and plans for it. Ideally, this leads to a process in which the children are involved in decisions about the money.

This should be a gradual process. You want to impart your values and experience and teach the children about handling money. But you want a transition, because you don’t want decisions made that endanger your lifestyle or the wealth. Many people find a good early step is to involve the children in choosing the objects of family charitable gift

At some point, your financial advisors meet the family and explain their roles. Some financial professionals also like to meet separately with family members so they can learn things people aren’t willing to say in front of other family members. The estate planner could explain the current plan. An investment advisor can explain the portfolio and the strategies for it. These experts might explain things and answer questions better than the parents can, or family members might be willing to ask questions they wouldn’t ask a parent.

Very wealthy families that are successful in perpetuating wealth and family unity establish a formal process. They often form a family council and might have a family charitable fund with a board of family members that chooses the gifts. They have experts on family wealth moderate discussions in which the family participates.

Not every family needs a formal process like that. But every family should try to establish multi-generational communication on these issues. Most estate planners can help with the process or refer you to someone who helps with the process. You also can contact The Heritage Institute (www.theheritageinstitute.com) or read the organization’s novel, “What Matters,” by Cam Thornton and Rod Zeeb.

Continue reading Part 2 of this article here.

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