What tests should be run on estate plans to ensure that they work when times get tough? This article tries to answer the question.

As readers know, there is a lot of commentary about inter-generational wealth transfer and the importance of estate planning. But having a plan is one thing. Having a plan that works in difficult times is another. What stress tests can be applied to plans to see if they are fit for purpose? And how should potential weaknesses or stumbling blocks in plans be addressed in ways that bring people together? 

To discuss the terrain is Michael Cozene, who is a partner and wealth and fiduciary advisor at Evercore Wealth Management and Evercore Trust Company. This article was adapted for Family Wealth Report from an article published by Evercore Wealth Management in 2023. The editors are pleased to share this content; the usual editorial disclaimers apply to views of outside contributors. Jump into the conversation! Email tom.burroughes@wealthbriefing.com

Stress tests can take the stress out of the biggest, most complex tests. That’s how regulators evaluate financial reserves, community organizations prepare for disasters, and doctors and trainers measure how healthy they are. It’s also how families can prepare for inevitable, potentially sudden change. Stress testing an estate plan can help ensure that – when it really matters – plans can stick.

What could a gathering of the people named in an estate plan, including advisors, reveal? Are there any existing or potential, practical, or interpersonal conflicts that can be addressed sooner rather than later, or before it’s too late? Is there sufficient liquidity to pay taxes and meet other pressing needs? Which assets go into which entities? Who will cover any unexpected costs, any outstanding debts? Who will make those and other, often very difficult, decisions? Estate plan stress tests can strengthen family and advisory relationships, clarify roles and responsibilities, and reassure those involved. Everyone will know what to expect, what to do, and who to turn to when the time comes.

Here are brief highlights of some possible findings and solutions.

Conflicts among family members
Family conflict is a significant and increasing challenge in estate planning. There are more blended or otherwise complicated families and, as a result, more potential for differing expectations and disputes over inheritance. This exercise will allow families to think through who would inherit specific assets and, if there were a family business, who would manage the business assets. Detailing the plan with the appropriate legal documents and clearly communicating the intentions and wishes can go a long way in avoiding conflict. It’s a good idea to review and update these documents at least every five years or so, or when there is a major life event such as birth, death, marriage, divorce, or the sale of a business.

Uncertainty over what, when and how much to leave children
Many families struggle with how much their kids should inherit and how they will receive it. Certainly, a level of maturity is needed to manage assets and make spending decisions. But even adult children may not have the financial sophistication for handling a large or complex inheritance. A trust can protect assets against any existing and future creditor claims and against failed marriages, provide for family members with special needs, and distribute assets at predetermined ages or other milestones. 

Assets can be left in a trust for a child’s lifetime and a skilled fiduciary (or co-fiduciary) can help distribute the funds properly and prudently. The principal can also be left in a dynasty trust and benefit multiple generations, subject to the state’s perpetuity rules. 

Heirs will need liquidity to cover taxes
At present, the annual federal estate tax exclusion is $12.92 million (double that for married couples). The remaining estate will be taxed at the top federal statutory estate tax rate of 40 per cent. More concerning for many high net worth families is that the exemption amount is scheduled to be cut roughly in half after 2025 to an estimated $7 million per person. Federal estate taxes are due nine months from the date of the decedent’s death and must be paid before remaining assets can be distributed. So, it’s important to make sure that there are sufficient liquid assets to pay taxes. It is also worth thinking now about annual giving and more significant wealth transfer strategies to minimize that potential tax bill.

The terms of a trust might cause problems for heirs
Some areas that are often overlooked in trust documents include trustee’s breadth of authority (trustee powers), the beneficiary/beneficiaries of the trust receipts and disbursements (principal and income), and the responsibility for paying the estate tax (estate tax apportionment). This usually becomes relevant when an estate owns private businesses that make uneven distributions to a trust. Make intentions clear; ask the right questions to kick the trust’s tires; and ensure that the trust language is flexible.

Vacation homes should be fun, not a burden or cause of strife
A family vacation home can present unique emotional and planning challenges. To minimize family strife, speak individually with each child about their hopes for owning and using the property and how they see family dynamics playing out. Then communicate the decision clearly, whether the property is to be kept in the family or if it’s to be sold or gifted to charity.

Before it is too late, talk with the trustee
It’s critical for all family members to understand what will happen next. What are the roles and responsibilities of each member, and who will make specific important decisions? The trustee is charged with the responsibility of managing or administering the trust, and if the trust document is unclear as to the grantor or settlor’s intent, the trustee is left to speculate, which can lead to misinterpretation and potential unintended consequences.

The wrong fiduciaries are named in documents
Are the fiduciaries and successor fiduciaries named in the documents still suitable? A fiduciary is an individual or corporation that is essential in implementing the plan and carrying out the trust’s wishes, and can include an executor for the will, trustee of the trusts, and agents named for healthcare and property.

Individuals age or quarrel; corporations can merge into others or be acquired. Often the best solution is to appoint a willing and able family member as one fiduciary, and a professional co-fiduciary (such as a trust company) as the other, to manage the assets and handle the administration, recordkeeping, and tax responsibilities.

Stress testing an estate plan can inevitably raise issues that need to be resolved. And there’s no time like the present.