Many estate planners advise their clients to complete a useful, albeit sobering, exercise. The exercise calls for the client to assume they have died, and that their beneficiaries are gathered around the dining room table dealing with the aftermath. The point is to identify before the fact some key estate planning questions a client may need to address. They include:
- Do your heirs know the names of your attorneys, accountants, financial advisors and estate lawyers?
- Are estate planning documents current and consistent with your wishes?
- Do your estate planning documents minimize taxes and avoid probate, where appropriate?
- Is the executor of your will still someone you are comfortable entrusting with this meaningful responsibility?
- Are your estate planning documents well-organized and readily available to your heirs?
- Can your heirs access cash that may be needed in the short term, before your estate is settled?
- Do you have adequate life insurance?
- Are your insurance policies located in a place where they can easily be found?
- Will your heirs know where to find other important papers, like prenuptial agreements, employment benefits statements, income tax returns and business agreements?
- Is there a plan in place for dealing with illiquid assets (like real estate, an ownership interest in a closely held business, etc.)?
- If you have children under 18, have you designated someone to raise them? Have you made financial arrangements to fund the cost of raising and educating your children?
- What will happen to your pets?
- Have you adequately provided for the needs of your loved ones?
- Have you set forth “final wishes” for how you want your funeral service to be handled?
- Do you want to be buried or cremated?
- How will you dispose of your “digital estate?”
- Have you made a list of all of your digital accounts and passwords?
I have written previously about a basic flaw that exists in nearly every estate planning document I have reviewed. I am going to repeat that advice here because it is so critically important.
You need to provide for how you want the funds in any trust set up for the benefit of your heirs to be managed. This advice can also be used to guide your heirs in the event they control their inheritance directly and manage it on their own.
Recently, a widow consulted with me. Her husband had left her $2 million in trust more than 15 years ago. He made no provisions for how this money would be managed. The trustee retained a major brokerage firm who succeeded in reducing this inheritance from its initial value down to $600,000, generating obscene fees for itself in the process. I have heard many of these stories.
If you want to help your heirs avoid the same fate, there’s an easy way to do it, but it’s unlikely your estate planning attorney is aware of it.
Appoint a “directed trustee” for your assets, and give specific instructions for how the advisor retained by the directed trustee will invest your money.
A directed trustee is a professional trust company that only administers trusts. It does not manage money. It’s important to separate these two functions. Otherwise, the trustee has a vested interest in retaining the asset management division of its company to manage your assets. Full-service trust companies, in my experience, rarely manage funds in a manner consistent with sound, academically validated principles of finance.
Appointing a directed trustee is just the first step. Here’s some language you could consider including in your trust documents that will provide the necessary guidance to the trustee and the advisor engaged to manage your assets:
“The investment manager shall be guided by the basic principle known as modern portfolio theory. The investment manager should make no effort to ‘beat the markets.’ The investment manager shall focus on the asset allocation of the portfolio. The portfolio shall be globally diversified, using low management fee stock and bond index funds, exchange-traded funds or passively managed funds. The investment manager shall be guided by the principles set forth in ‘The Intelligent Asset Allocator’ by William Bernstein, ‘A Random Walk Down Wall Street’ by Burton Malkiel, ‘The Little Book of Common Sense Investing’ by John Bogle and ‘The Smartest Investment Book You’ll Ever Read’ by Daniel R. Solin. If appropriate, the investment manager may invest in a laddered bond portfolio, following the guidelines set forth in ‘The Only Guide to a Winning Bond Strategy You’ll Ever Need’ by Larry Swedroe and Joseph H. Hempen.”
Your estate attorney can include additional language giving the trustee discretion to depart from these guidelines if circumstances warrant.
While this is a very useful and critically important exercise, I suspect very few Americans actually do it. By some estimates, half of Americans with children don’t have a will.
Without a will, you will die “intestate,” which means the state of your residence will determine how your assets will be distributed. Probate laws vary widely from state to state.
The responsible and intelligent thing to do is to prepare for your inevitable demise. Perhaps the greatest gift you can give your loved ones is to protect them from the traditional securities industry, which has a long history of transferring wealth from their clients to themselves.
This commentary originally appeared February 17 on HuffingtonPost.com
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