Better estate planning meets the goals of two constituencies:

1. The planning generation (customers); AND
2. The generation(s) that will benefit from it (beneficiaries).

Clients must make the final decisions about where and how to transfer assets. However, they can often achieve better results if their estate planning meets the goals of their beneficiaries. Additionally, estate planning works best when beneficiaries understand how the strategies work and why indirect trust transfers can be better than direct gifts or bequests.

Typically, attorneys and other advisors only explain planning alternatives to their clients. These clients then make planning choices without any input from the beneficiaries, even when the clients believe they have responsible adult beneficiaries. This lack of input occurs even when clients' goals include wanting their planning to satisfy their beneficiaries.

Direct transfers error

Most clients begin the planning process believing that outright gifts and bequests will work best for their beneficiaries. They also believe that their beneficiaries would prefer direct transfers to trust transfers. But this is not necessarily true. Planners should explain the risks of direct transfers to clients. In my experience, once clients understand the benefits of trust transfers, they prefer them.

However, clients often remain concerned that their beneficiaries will believe that a trust transfer, rather than an outright one, will not work well for the beneficiaries. Addressing this concern involves persuading clients to allow their attorneys to explain to beneficiaries the risks of direct transfers and the benefits of trust transfers.

Planners can also explain how good design can provide as much flexibility and control to beneficiaries as desired by beneficiaries, but only to the extent acceptable to clients.

Risks of direct transfers

Full transfers expose beneficiaries to unnecessary risks that:

1. property may be lost to the claims of creditors;
2. property may be lost to a future ex-spouse (clients may love their beneficiary's spouses, but that love quickly fades after a divorce, especially if the ex-spouse seeks to take property from the beneficiary);
3. inherited property may result in unnecessary estate or gift taxes when the chosen beneficiary dies or gives it away; AND
4. wealth will be lost due to negligent investments or expenditures by beneficiaries (clients with confidence in the judgment of particular beneficiaries may not choose to defend against negligence).

These risks can generally be eliminated by leaving property in well-drafted trusts, customized for each beneficiary.

Giving control to beneficiaries

To the extent that clients wish, trusts can give beneficiaries control (in most cases after the clients have died) over investments and control over distributions. (Control over distributions benefiting the beneficiary may require the consent or approval of a technically independent third party to increase creditor protection and keep the property outside the beneficiary's taxable estate.)

Further, clients may limit the level and timing of beneficiary control, among other restrictions, by limiting the amounts or timing (often by age) of allowable distributions, by limiting eligible investments, by limiting allowable nominees (see para other), delegating decisions on these or other issues to relatives/trusted advisors. Clients can dictate the limits they want to offer or engage with beneficiaries to develop acceptable limits for both clients and beneficiaries.

Clients can also determine where and how the property will pass when the first-tier beneficiary dies (or no longer wants the property). The trust may specify the terms of such passing, or the settlors may allow the beneficiaries to choose where and how the property would pass through limited powers of appointment. Many clients will choose to structure limited powers in a way that keeps the property in the chosen bloodline.

Although these beneficiary trusts must file income tax returns, most income distributed within 65 days of the end of a taxable year is taxed to the respective beneficiaries instead of the trust.

Administrative Benefits

The benefits of leaving property in trust depend on good drafting and proper trust administration.

The chances of sound administration are materially increased when beneficiaries understand the benefits of holding property in trust and how the trust should be administered. Trusts will work best when the drafting adviser has explained these issues to the beneficiaries.

Improved results

Participation can provide comfort to clients in planning for the benefits of substantial gifts or bequests in the trust, rather than directly when clients know that the beneficiaries value the benefits of the trust and the flexibility afforded to them. It also improves the chances that gifts or bequests will be properly administered.

My experience shows that clients and beneficiaries appreciate this type of participatory planning.