Estate Planning Techniques Every Financial Advisor Should Know
Estate planning is an important part of any comprehensive financial plan. Although most financial advisors aren’t lawyers, they can help clients prepare their estate plans. Lawyers execute estate planning documents such as wills, trusts, powers of attorney, and healthcare directives. However, financial advisors assist clients in making important decisions regarding their assets.
Procrastination is the primary reason Americans haven’t made a will or trust, according to data from Caring.com. Financial advisors are critical in encouraging their clients to make advanced preparations. What should a financial planner recommend for estate planning clients?
This guide to estate planning techniques shares how to assess clients’ needs and overcome challenges in planning for different client demographics. Read on to boost your estate planning practice with top tips for financial advisors.
Comprehensive Assessment: The Foundation of Estate Planning
Financial advisors should thoroughly understand a client’s assets, liabilities, goals, and family dynamics. Using this knowledge, advisors can effectively guide clients through estate planning. Advisors should complete a comprehensive assessment to ensure the best estate planning techniques are used.
Financial planners should consider how they inventory a client’s financial situation. Using a tool like Asset-Map lays the foundation for a comprehensive assessment. Asset-Map facilitates a clear starting point for estate planning discussions, offering visualizations of client’s assets and liabilities.
Top Estate Planning Techniques
So, what estate planning techniques should financial planners use with their clients? Several techniques might apply to your clients’ needs. We’ll highlight top strategies to protect your clients’ assets and honor their wishes.
Wills and Trusts
Wills and trusts are legal instruments for passing assets on to heirs or other family members. Both serve to respect a person’s wishes regarding the distribution of their estate.
Wills are instructions for distributing a person’s estate after death. The testator or creator of the will chooses an executor to manage the estate after the person's death. The document clearly outlines how the executor should manage and distribute the estate. This may include distributing assets and property, funeral requests, guardianship of minors, charitable donations, and more.
When structuring a will, keep in mind:
Wills are especially beneficial for people with minor dependents or end-of-life care wishes.
Wills do not avoid federal estate taxes.
Wills can be subject to probate and contested by others.
Wills only take effect after a person’s death and don’t protect assets if incapacitated.
Trusts are legal entities created by grantors to ensure their assets are passed on to the correct beneficiaries. They give the grantor more granular control over their estate and help avoid the time-consuming probate process. Unlike wills, trusts are funded, meaning assets are transferred into a trust account. According to the grantor's instructions, the authorized trustee distributes the assets in the trust account to named beneficiaries.
When structuring a trust, keep in mind:
Trusts are ideal for reducing estate taxes and avoiding probate.
Trusts do not provide any type of guardianship.
Trusts bypass probate and, therefore, are less often contested.
Trusts can take effect while the grantor still lives and protect assets if they become incapacitated.
Advanced Directives and Power of Attorney
Advanced directives state a person’s medical care instructions and only go into effect if they cannot communicate their wishes. Living wills fall under this category and outline one’s medical wishes and what to do with their body upon death. Do not resuscitate (DNR) orders are also included under the advanced directives category.
A power of attorney (POA) is a legal document that gives a chosen “agent” the power to make decisions on behalf of another person. A general POA allows the agent to handle medical, financial, and legal decisions. POA is a tool for planning for incapacitation due to conditions like dementia or brain injury.
Advanced directives and POA should be integrated into estate planning to ensure clients are prepared if they cannot make their own decisions.
Tax Implications and Strategies
Estate planning often involves minimizing estate taxes to protect one’s wealth. Depending on the estate's value, a beneficiary might need to file an estate tax return. Financial advisors can help reduce tax liability by reducing the property size or lowering the valuation of the taxable estate.
To do this, several estate planning techniques can be used, including:
Gifting. A person can gift up to a certain annual exclusion amount to multiple beneficiaries without incurring gift taxes. Common vehicles for gifting include 529 college savings plans, medical care provider payments, and grantor-retained annuity trusts (GRAT).
Charitable Donations. Donations can also be made through charitable remainder trusts (CRT), charitable lead trusts (CLT), or a donor-advised fund (DAF) for a charitable income tax deduction.
Irrevocable Life Insurance Trust (ILIT). ILIT keeps death benefits outside a client’s taxable estate to minimize tax liability. A grantor will make annual gifts to beneficiaries in an irrevocable trust and notify them of the right to withdraw their gift for a limited time. The temporary withdrawal rights allow an ILIT to qualify for annual gift tax exclusion. The trustee uses the gifts to take out life insurance on the grantor. With the ILIT as the insurance policyholder, the death benefits are not considered taxable estate.
Portability Election. This strategy “transfers” a late spouse’s applicable exclusion to the living spouse via the executor.
Special Techniques for Unique Assets
Including valuable digital assets like cryptocurrencies, non-fungible tokens (NFTs), digital rights, and monetized video channels in estate planning is also important. These assets can be managed like other types of property in an estate, but families may face challenges, including:
Unknown passwords
Data privacy laws
Data encryption
Criminal laws
Update estate planning documents to provide lawful consent for executors to give the digital assets to the right individuals.
Creating a succession plan is key to handling business ownership in estate plans. Family succession, sale, or management buyouts are all strategies for managing a business after one’s death.
International property in estate plans is handled similarly to domestic property, with some added layers, including:
International tax regulations
Residency and citizenship rules
Domicile status differences
Possible double taxation
Leveraging Technology to Enhance Estate Planning
Financial advisors can elevate their estate planning services by leveraging innovative technologies. Platforms like Asset-Map can help advisors facilitate deeper conversations with clients. Asset-Map creates easy-to-understand visual maps of complex estates to help clients see their financial picture clearly. Integrating Asset-Map with other financial planning tools like Orion and Nitrogen allows for a comprehensive planning approach.
Estate Planning for Different Client Demographics
Financial advisors must also consider the different client demographics when working with them. Their estate planning needs will be unique, and you should aim to use the best techniques for each.
Diverse Family Structures
When tailoring estate plans for diverse family structures like blended or non-traditional families, consider:
Using trusts for asset distribution
Specifying guardianship for minor dependents
Carefully navigating complex dynamics
Prioritizing fairness to minimize conflicts
High-net-worth Individuals
High-net-worth clients may have more complex estate planning needs and special considerations. Some advanced estate planning strategies to consider for high-asset clients include:
Generation-Skipping Trusts
Family Limited Partnerships
Dynasty Trusts
Intentionally Defective Grantor Trusts
Young Families and Singles
A few estate planning strategies tailored to younger clients or those without dependents include:
Thinking “upstream” to parent and grandparent beneficiaries
Emphasizing the impact of charitable giving
Avoiding intestacy
Overcoming Common Challenges in Estate Planning
Financial advisors may need to help clients navigate or mediate disputes and family conflicts during the estate planning process. To overcome these challenges, use the following techniques:
Review plans frequently
Facilitate open communication
Remain neutral as the advisor
Show empathy
Build trust over time
Regularly reviewing and updating estate plans are key to avoiding conflicts and disputes. Asset-Map helps streamline client conversations about changes in estate plans with visualizations.
Boost Estate Planning with Asset-Map
From gifting to managing digital assets, we’ve shared estate planning techniques to help you thrive in your practice. Remember to work closely with an attorney to create and execute your clients’ estate plans.
Financial planners can improve their estate planning by adopting Asset-Map into their methods. With Asset-Map’s advanced capabilities, advisors empower clients to better understand their financial plans. Access training resources and schedule a demo to see Asset-Map in action.