Uncertainty is a part of life, whether it has to do with international politics, tax reform, the business climate, or life changes. For example, the coronavirus pandemic has led to not just health but economic anxieties as well with its impact on the economy, stock market, and employment.
Not having all of the answers in situations like these is unavoidable—but that doesn’t mean you can’t plan for potential needs, whether the situation is happy and intentional—such as marriage, a new baby, or planned job changes—or unexpected.
Stuart Green, Senior Wealth Planner at Wells Fargo Private Bank, understands why people may put off updating their wealth plans. “There are many reasons: no one can see 20 years into the future; the work can be complicated; the legal documents are confusing; and no one likes to think about dying.” However, he reminds that the benefits of reviewing and updating plans every few years can be worth it: “Plans should keep up with important life events such as retirement, sale of a business, birth of a child or grandchild, divorce as well as financial events, such as tax code changes. Otherwise, your plan is not positioning you to be on track with your financial goals.”
To help you deal with future uncertainty, Green recommends having a discovery conversation with your financial team to map out your situation and build flexibility into your plan. Read on for tips on how to make that happen.
Don’t be afraid to get help
Getting started can be the hardest part. “Keep in mind that you do not have to tackle planning by yourself,” says Green. “There are many advisors out there who are specifically trained to help with organizing your wishes into specific action items. Our goal is to help you figure out where you stand against where you want to be and to help you evaluate the risks and rewards of a given situation.”
Share all your information
When working with clients, Green and his team begin by reviewing financial records: tax returns, investment portfolios, insurance policies, trusts, and other estate-related documents, and more. He notes that this comprehensive review nearly always turns up something that could be done to strengthen clients’ strategic plans, even among those who are diligent planners.
The issue for clients: Pulling all that information together isn’t necessarily hard, but it takes time. You also need to be sure that you consider all of your non-financial assets as part of this review. “Well into our second meeting,” Green shares, “one client mentioned that he had accumulated a museum-quality antique collection over many years. Not considering the collection as part of his ‘financial’ picture, he wasn’t aware that this created a potential landmine in the middle of his estate plan that could force his family to liquidate the collection at bargain-sale prices to cover the estate tax liability.”
Consider tax changes when reviewing your plan
Several acts have passed over the past several years, including the Tax Cuts and Jobs (2017) Act, the Setting Every Community Up for Retirement Enhancement (SECURE) Act, and now the Coronavirus Aid, Relief, and Economic Security (CARES) Act—all of which are examples of why flexibility and review are critical parts of any plan, says Green. “Considering this new legislation and potentially broader changes to the original 2017 Act being discussed by legislators, now is an important time to reach out to your tax, legal, and wealth advisors about your estate and tax plans.”
“With the 2017 Act, pretty much every estate plan needs to be reviewed as a result of the tax law changes, especially estates below $23 million.”
According to Green, “After the 2017 Act went into effect, I met with a client who had last revised his estate plan back in 2008. The plan created a trust for his children, automatically funded with an amount equal to the entire estate tax exemption, and a trust for his wife. Back in 2008, with roughly $10 million in his individual name, this would have resulted in $2 million going into the trust for his children the remaining $8 million going into the trust for his wife. However, with the dramatic increase in the estate tax exemption, under current law their plan would have resulted in the trust for the children receiving the full $10 million with the spouse getting nothing. Needless to say, this was not their intention, and they were shocked when I pointed this out to them.”
The passage of the SECURE and CARES Acts in 2020 provided even more reasons to consider taking a fresh look at your estate and retirement plans with your tax, legal, and wealth advisors. The SECURE Act eliminated the “stretch IRA” and extended the age for required minimum distributions (RMDs) from 70½ to 72. The CARES Act temporarily waives RMDs in 2020 (with the exception of RMDs required for the first year) and allows funds to be withdrawn from retirement accounts without early withdrawal penalties if they meet guidelines related to COVID-19.
Focus on insurance coverage and health care costs
Well drafted documents prepared by an attorney who specializes in estate planning can help avoid these types of issues by including flexible provisions to better address changes in tax law and your personal net worth. As you plan, you should also consider short- and long-term needs for your health and property.
Otherwise comprehensive plans often have gaps in insurance and health care, so Green recommends checking to see that clients have sufficient insurance coverage, from property and casualty insurance to health insurance to life insurance. Affluent and high-net-worth clients may need umbrella policies that provide them extra liability protection beyond what’s available in their home or auto insurance policies.
One in four of today’s 20-year-olds will become disabled at some point before they retire, according to the Council for Disability Awareness. People who are working, especially those with net assets under $5 million, may want to consider disability insurance to help protect their income in case illness, injury, or something else prevents them from working.
Involve your family in your conversations
A key part of the planning process involves communicating the plan to others who may be affected by it. By providing more financial clarity early on, everybody involved should understand both your wishes and their responsibilities. This candor can pave the way for less family uncertainty and discord in the future. Not everyone may be comfortable with sharing every detail of the estate plan, but communicating information can be done effectively without disclosing exactly how much you plan to leave to your children and other beneficiaries.
“One thing I have learned is that setting expectations with your family is critical, especially when your plan treats family members differently,” says Green. Many parents are concerned about how their children will get along after they are gone, so family dynamics can be important to address as you plan.
“As part of our discovery process, one couple shared that their children have very different personalities and skills, and they want their grandchildren to continue to be close. Given their concerns and goals, we first established a strategy for achieving their goals for wealth transfer. Now, we are working together to determine how best to present their plan to the children, including determining the level of detail to share and conveying what their parents are doing for them rather than inviting questions about why their parents didn’t do what they expected.”
Continually update your plan
Planning is an on-going process, Green says. He suggests people review their financial strategy with a professional advisor on a regular basis, even if it is just to check-in and make sure there haven’t been major changes that need to be incorporated. After all, changes in market conditions, tax laws, and your life stage can all trigger changes to your wealth plan.
Keep others informed
“Now more than ever, we recommend that people communicate with the appropriate family members and advisors so that key parties know their wishes and plans as well as where important documents are stored and how to access them if needed,” says Green.
Storing documents in a safety deposit box or a home safe can be a secure storage method, but oftentimes this type of storage is not easily accessible by anyone else.
“Many clients keep copies of their estate plan and other documents in a file at home or electronically and have their attorney securely store the original documents in the attorney’s safe. This way the attorney can notify the personal representative or power of attorney holder when needed, but someone has to know to call and let the attorney know that something has happened.”