People often overlook critical steps when they are doing their estate planning. And those financial advisors who can help them identify those steps are not only going to earn potential clients, but might even gain themselves the trust of attorneys—and thus referral sources—in the process.
There are steps you can take that simplify an estate plan, for instance, maybe by simply cutting down the number of vehicles. (Have you ever met a client who said, “Please, I would like more trusts?”) Other steps may save clients income taxes, or protect their assets. No client ever wants their hard-earned wealth lost when their child divorces, for instance, and would likely be interested in trust vehicles that prevent that from happening.
Once you’ve discovered the opportunities, you must involve your client’s estate planning attorneys. That allows you to provide them with more work, and perhaps convert them into referral sources!
Identifying The Opportunities
To identify those opportunities, you should have the entire picture of your clients’ finances, including a balance sheet of each “bucket” of their resources: their personal assets (for example, the assets in the name of each spouse), their trust assets (the assets in the name of each trust), the qualified plan assets, etc. Most important, you talk with them regularly. Most estate planners can’t get their clients into the office even once every few years.
To find things the clients themselves have overlooked, you can of course simply read all their documents, but technology has come a long way, and there is now AI assisted software, such as FP Alpha, that gives you a simple, low-cost way to jump-start the planning process and allows you to bring together a summary of every trust and distribution plan. Doing it this way also lets you explain the various scenarios to the clients visually, which expands your ability to help them.
Once you’ve let clients know that there are several things they could do to improve their estate plan, you’ll likely want to start discussing specific planning techniques that might help them achieve their goals. Here are a few common ones ripe for discussion:
Spousal Lifetime Access Trusts
A spousal lifetime access trust, or SLAT, is an irrevocable trust. Current law allows spouses to pass assets to each other tax-free (up to $12.06 million in 2022). But sometimes a grantor wants to transfer part of that exclusion into a SLAT to provide for his or her spouse and descendants; meanwhile, the SLAT keeps assets out of the donor’s estate. The unique feature of this trust is that it authorizes the trustee to make distributions to the grantor’s spouse, while also allowing the grantor to name children or other heirs as beneficiaries. SLATs have been a very popular planning tool since 2012 and especially from 2020 to 2021 when there were fears of significant change in estate tax rules. Many couples use these trusts to protect assets from lawsuits (for example, when the grantors are physicians).
However, the trusts also have some potential drawbacks. One approach to using them is to make the husband a beneficiary of the wife’s trust and vice versa. While both are still alive and married, the couple might benefit from all of the assets transferred into these trusts, even though those assets hopefully remain outside their estates. But if one spouse dies prematurely, the other may be cut off from access to the assets in the trust they created for the now deceased spouse.
That loss of access on the first spouse’s death, as well as the restrictions the SLATs contain on distributions, means a financial advisor might want to recommend that one or both of the spouses buy life insurance to fill the gap—and perhaps also disability and long-term-care insurance if the amount of assets held in the trusts are large enough (coverages the couple may not have otherwise wanted without the SLAT).
All this speaks to the necessity of reassessing a couple’s insurance needs as they pursue their estate plan. If you can fill in the gaps, or even if you can show when that isn’t necessary, you can help protect the attorney who created the plan if there’s financial trouble later. The attorney should review the SLATs to see if they can hold life insurance, and modifications might need to be made if they can’t.
Credit Shelter Trusts
While one trust could be a boon to your clients, another type of trust might have become a burden.
Credit shelter trusts are also sometimes called bypass trusts, since they bypass the surviving spouse’s estate. Though your clients might still have them, they are in many ways no longer advantageous: They used to be more common when the estate tax exemptions were much lower and thus the threat of paying higher estate taxes loomed larger. They were also more popular at a time when portability didn’t exist (in other words, before widows could use their deceased spouses’ estate tax exemption). The objective of the credit shelter trust back then was to let the surviving spouse benefit from assets when the first spouse died, but to keep those assets out of his or her estate.
But the past goals of the trust are increasingly irrelevant. Now the federal estate tax exemptions are much larger (they’re at more than $12 million, and they will still be $6 million if the current allowance sunsets on schedule in 2026). Thus, many clients who still have credit shelter trusts don’t really end up avoiding any estate taxes with them. What they do get, however, is costs incurred every year to administer the trusts and to file the trust income tax returns—and all for assets that won’t get a step-up in income tax basis when the surviving spouse dies. That could lead to a significant income tax cost.