When discussing estate planning I often talk about death planning versus life planning, so let’s break with down what I mean by that. Death planning is exactly what it sounds like. You’re planning to die.
You want to take care of who gets what when you’re gone. It’s pretty simple. A death plan might read, “When I die everything to my sweetheart if she’s gone everything to our kids equally.”
In the world of death planning, the sun is shining. Your kids are healthy, they have good marriages, they can handle money responsibly, and you don’t have any disability or long-term care issues come up during your life. I know a client who was 94 when he passed away.
Every Sunday he would have Sunday dinner with his grandkids, who were pretty old and after one Sunday dinner he felt a little tired so he excused himself to go upstairs to bed and never woke up.
To me, that ends in a “Hallelujah!” I could if I could sign up for that right now I would and I think most everybody else would too. Live healthy into my 90s, have dinner with the grandkids, go to sleep and just never wake up? That sounds about as ideal as possible to me! The truth is, however, that most people don’t have that luxury.
In fact, I’ve known of people in their early 40s who have really serious dementia and cognitive issues from diagnosis or accidents. It’s very sad and it’s going to drain their family emotionally and financially.
You see, death planning ignores the possibility of long-term care and disability, and completely ignores what your kids’ world might look like when they come to inherit your money. A good example of death planning I see is the transfer of death instruments for a piece of real estate.
That form is just an automatic reflex of a death plan that says, “When I die transfer this property to my son.” A transfer on death instrument doesn’t say transfer my property to my son unless that son is going through a divorce, or unless he has a business that just went under from a bad economy, or unless he just happened to get disabled in a car accident. No, it says to my son and whatever problems he has that house will be right there to absorb those problems.
So if he’s is caught in a financial flood that house can be thrown right in the water and it gets swept away in the current of creditor’s claims, divorce issues, or, if he’s on disability, it could cost him his disability benefits permanently. All that to reason out why I don’t like death planning.
Death is important to consider of course but it’s a really small piece of modern estate planning. To be honest, I spend a very small time talking about it with clients, unless they have really specific instructions that they need to get a certain piece of property to somebody under certain circumstances, it’s a pretty brief part of all our discussions.
The items that take up most of our time are life, trust funding, disability, and multigenerational income tax planning.
Life planning, on the other hand, is a way to plan not only for your death but also for the rest of your life, the rest of your spouse’s life, and the rest of your kid’s lives. So if you’re disabled, the right people are in place to start making decisions for you.
It is crucial for those people to have the right amount of flexibility to add pieces to your estate plan, to protect assets from being spent on long-term care costs.
Your life plan, when done right, will contain the instructions to your advisors and loved ones on how to make income tax decisions, estate tax decisions, generation-skipping tax decisions, all those decisions can be made for you if you have an ironclad, clearly spelled out, plan on how to do those things.
The right kind of life planning has the flexibility that allows you to structure the inheritance for your kids to fit their actual collective and independent situations when you pass away and avoid guessing where they might be when you pass away.
Let’s break those statements down a bit.
First, let’s define “life planning.” Life planning is an honest and proactive approach to planning for the modern world of aging, retirement, and tax.
I also mentioned that the right kind of life plan will have instructions in it for your advisors. These instructions will appear in various documents, from your healthcare and financial power of attorney documents to your trust. These documents must consider the rest of your life, not to mention the life of your surviving spouse and the lives of your kids, in order for you to have a life plan.
The rest of your life, whether you want to admit it or not, has a risk of disability, incapacity, and dementia, and therefore any good life plan needs to confront these issues head-on. Similarly, the tax environment is all but guaranteed to be different throughout the rest of your life.
The tax code changes with the swing of the political pendulum and it would be foolish to have a plan that cannot have the flexibility to deal with future unknowns when it comes to taxation as well.
Speaking of flexibility and tax, a quality life plan also needs to be able to be flexible in the way your assets are transferred to your kids when you and your spouse pass away.
If you have the right authorities laid out in the distribution section of your trust, you can really enhance the number of assets that end up in your family’s pocket and not in the pocket of the government.
Wouldn’t it be nice for your son to be able to say, “Hey I don’t want to receive this IRA because I’m in a high-income tax bracket? Let’s let my sister inherit it and I’ll take the house – which will not cause me more income taxation and we both come out ahead.
I hope you see why I say that planning to die is the easy part of my practice and understand why my conversations with my clients do not focus on death, but rather on all of the issues that are inherent in living longer in a new tax world. I imagine that the planning process for most of you did not even come close to bringing these things up, but that’s OK. The time is always right to improve your situation.