4 minute read

Common Estate Planning Questions From Clients

Hear from Financial Advisor, Samuel Deane, on commonly asked questions about estate planning from clients.

Samuel Deane

Samuel Deane, @samueldeane

Founder, Deane Wealth Management

As a financial advisor, I frequently encounter a myriad of questions from clients who are eager to secure their financial legacy but find themselves navigating through a maze of uncertainty and complexity. Whether it's the dilemma of choosing between a Will and a Trust, understanding the implications of taxes on inheritance, or the intricacies of appointing the right executor, these concerns are both common and significant. I've found that addressing these questions in an informative and reassuring manner can help clients feel more confident about their estate planning decisions. After all, our goal is to provide clarity and guidance, helping our clients make informed decisions to ensure their estate is managed and distributed according to their wishes, with minimal complications for their loved ones. 

In this post, we aim to demystify estate planning by addressing the most common questions our valued clients have raised and what you're likely to encounter as a financial advisor implementing estate planning into your financial planning process. Let's explore these questions together and pave the way for long-term relationships enabled by education and authentic conversations. 

If I choose to leave my money in a Trust, can I specify that our kids should receive a certain amount every year? Or can the money only be distributed as a lump sum linked to a specific event?

Leaving money in a Trust gives parents and grandparents a great deal of flexibility in how the assets are distributed to children and heirs. For example, parents can specify that their child should receive a certain amount of money from the Trust every year, which is commonly known as Trust income. Parents can also link distributions to a specific event. Let's say a beneficiary inherited a lump sum; creators of the Trust can provide instructions for children to receive distributions only as it relates to education expenses. 

Can money in a Trust be invested? Is it possible to create a passive income stream for our children by using a Trust?

Money held in a Trust can certainly be invested, and it's a common strategy to create a passive income stream for your children or beneficiaries. For instance, cash in the Trust can be invested in various ways, such as stocks, bonds, rental properties, startups, or other income-generating assets. Not only is it common, but it is also generally a best practice for income-producing investment property to be held in Trusts.

Suppose we want a friend or relative to be responsible for our child's inheritance. Is it common to set aside a portion of that inheritance as payment for their time?

Designating a friend or relative to serve as the manager or custodian of your minor child's inheritance is a common practice. This person is often called a "guardian" or "Trustee." Whether it's appropriate to set aside a portion of the inheritance as payment for their time depends on various factors, and it's a decision that should be made thoughtfully.

It's perfectly reasonable to compensate Trustees or guardians for their time and effort in managing the inheritance, and the specific terms for compensation can be outlined in the Trust document.

Above all, it's essential to have open and honest communication about compensation. Make sure everyone involved understands the terms and is comfortable with the arrangement. Clarity can help prevent misunderstandings and potential conflicts. You could also explore other ways to acknowledge their efforts. This could include a one-time gift or a provision in the Trust for them to receive a specific item or asset as a token of appreciation.

Or is it better to hire a professional to serve as the Trustee?

The benefits of hiring a professional to be the Trustee of your minor child's inheritance are having someone with the expertise and experience to manage financial assets, someone with an objective and impartial approach to managing the inheritance and avoiding family conflicts and personal biases. Professionals are also held to higher standards and legal obligations, which can provide peace of mind regarding the proper management of assets. However, a lack of personal connection or understanding of the family's dynamic can be a disadvantage.

If we want to give our children their inheritance while they are still living, what financial mistakes do we need to watch out for? Are there hazards parents should avoid?

Transferring an inheritance to your children while you are still living can be a generous and thoughtful financial decision. However, there are several financial considerations to be aware of. In addition to the annual gift exclusion, the U.S. also provides a lifetime gift tax exemption. This means individuals can gift a certain amount over their lifetime without incurring gift tax. The lifetime exclusion for 2023 is $12.92 million. If grandparents are considering transferring assets to their grandchildren or individuals more than one generation below them, be aware of the generation-skipping transfer tax. When you gift assets, the recipient generally assumes your cost basis for those assets. If the assets have appreciated significantly, children might face capital gains tax when they sell them. This can be significant with highly appreciated assets. For example, imagine Grandma purchasing Apple stock 30 years ago. She would have paid close to $25 per share, and the stock is now valued at $189 per share today. That equates to $164 per share in capital gains. Depending on the number of shares Grandma owns, beneficiaries could face a hefty tax bill if and when they sell the stock. 

On the other hand, if your children inherit assets upon your passing, they often benefit from a "step-up in basis." In other words, instead of inheriting Grandma's cost basis of $25, your cost basis would be $189 if Grandma passed away today. Ultimately, a step-up in basis results in a reduced capital gains tax liability. Using the example above, you'll likely pay a lot less in capital gains taxes if your cost basis is $189 vs $25. Essentially, gifting assets during your lifetime reduces your taxable estate, but your heirs inheriting your assets is a better deal for them. As with most things in personal finance, balance is key. 

Navigating the intricacies of estate planning can often seem daunting, but arming our clients with the right information and guidance makes all the difference. Estate planning is not just about preparing our clients for the future; it's about giving them peace of mind today and knowing that their loved ones are well cared for, no matter what tomorrow brings. This is the value of real financial planning, and this is the type of impact we can create with our clients. 

At Trust & Will, we’re here to help keep things simple. You can create a fully customizable, state-specific estate plan from the comfort of your own home in just 20 minutes. Take our free quiz to see where you should get started, or compare our different estate planning and settlement  options today!

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