Estate Planning in 2022: Considerations for the 99%

Dec 24, 2021 10:00:00 AM

  

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Like 2020, this year has been one for the record books. For the first time ever, young Americans (aged eighteen to thirty-four) are more likely to have a will than their older counterparts (aged thirty-five to fifty-four). The COVID-19 pandemic has forced younger Americans to consider the importance of estate planning and realize that it is not just a need of the ultrawealthy. 

This win, however, means that estate planning professionals have their work cut out for them in 2022. Despite the significant increase in demand for estate planning services among young people, Caring.com’s 2021 study found that “middle- and older-aged adults are less likely to have a will now than they were just one year ago.” Daniel Cobb, 2021 Wills and Estate Planning Study, Caring.com (last visited Dec. 21, 2021).

As we head into 2022, educating the general population, particularly middle and older generations, should be central to every law firm’s communication strategy. Below are some helpful concepts to keep in mind as you provide estate planning services for the 99 percent.

The Revocable Living Trust is King

In her WealthCounsel Quarterly article, “Revocable Trusts: Considerations for the 99 Percent,” Alvi Aggarwal, JD, LLM, explains that a revocable living trust (RLT) is often a beneficial choice for the majority of her estate planning clients, including those who are not among the wealthiest 1 percent of Americans. Here are some of the benefits of an RLT.

An RLT spells out how to deal with a temporary or permanent period of incapacity. It is often a better vehicle for handling incapacity than a durable power of attorney. If a client becomes incapacitated, an RLT provides instructions for a successor trustee, designated by the client, to handle the client’s finances. Without an RLT, assets may not be as easily accessible. 

When the client passes away, having an RLT can lessen the burden of administration compared to the probate process in many states. Keep in mind, however, that after the client’s death, the RLT gains its own independent tax existence. Also, the RLT is part of the client’s taxable estate. 

Further, an RLT or testamentary trust created under a will can prevent guardianships of minors’ estates. A guardianship terminates at age eighteen, and the remaining assets must be distributed at that point. A trust created under an RLT and a testamentary trust created under a will can provide additional flexibility, including allowing the trust payout to take place later. A trust created under an RLT is generally easier to administer and potentially more flexible. 

Privacy is another advantage of an RLT, as probated wills are typically a matter of public record. In contrast, RLTs usually do not become part of the public record, which clients often prefer.

Choosing an RLT instead of a will often depends on whether the benefits of the RLT outweigh its setup and funding costs. While the client will make the final decision with your help, an RLT is the wiser choice for many clients.

Prioritize Incapacity Planning

Dealing with the possibility of a client’s incapacity is another aspect of estate planning that affects a large population. Michael Simolo, JD, shared some of his expertise on this topic in his WealthCounsel Quarterly article, “Planning for Incapacity: A Primer.”

Incapacity does not affect senior citizens exclusively. In fact, a sudden illness or injury can strike people of any age at any time. A thirty-year-old single client who is severely injured on the job may not have a plan for who should direct his medical care and pay his bills while he recovers. Under those circumstances, friends, relatives, or an outside agency may have to petition the court to be named the client’s guardian or conservator.

Regardless of the size of a client’s estate, having a plan can save family members from unnecessary stress and expense. The prospect of premature incapacity is relevant to a surprisingly large population. The chance of a person becoming disabled between age twenty and retirement is 25 percent, and the chance of dying during that time is 13 percent. 

Cognitive decline is a gradual cause of incapacity that may also affect clients more often than you think. Seventeen percent of senior citizens aged seventy-five to eighty-four have some form of dementia. That number jumps to 32 percent after the age of eighty-five. Preparing for incapacity in advance can help family members avoid a battle in court over a guardianship or conservatorship and protect the client from financial exploitation. 

Working these issues out in advance by having the right documents in place is better for everyone. Depending upon the unique circumstances of your clients, planning for incapacity may include some or all of the following:

  • Structuring assets with joint ownership
  • Transferring assets to an RLT
  • Appointing agents through a healthcare proxy and durable power of attorney

Business Planning for the Next Generation

Thanks to the Great Resignation of 2021, demand for business planning services for clients leaving their jobs to start their own businesses will most likely increase as we head into 2022. Further, business owner clients often feel that their family business is the most important legacy that they have to pass to the next generation, so attorneys should be prepared to offer advice to clients who own businesses.

In her WealthCounsel Quarterly article, “Avoid Dropping the Baton While Transitioning the Business to the Next Generation,” Marty Oblasser covers an important business planning issue—succession planning.

Clients may be so consumed with managing the day-to-day operations of a business that they may neglect the existential matter of its future. In addition, someone who has spent decades pouring their efforts into growing a company may have a hard time even thinking about transferring it. 

Before creating the client’s succession plan, appropriate foundational documents must be in place to make the eventual transition smoother. These documents should spell out the structure of the business, its insurance coverage, and who can keep it running if the client cannot, among other things. 

Also before creating the succession plan, talk to your client about their family and its dynamics and goals. Members of the second generation can be included in this conversation. Open and honest discussions should reveal which family members are interested in leading the business into the future and which ones want to follow another path. 

Talk to your client about the benefits of a lengthy transition period from the first generation to the second. After all, the client most likely took a long time to build the business and establish relationships with vendors and customers. Everyone who deals with the business will need time to become familiar with the company’s new generation of leaders. 

Other considerations include providing adequate income for the outgoing owner and their spouse, as well as making inheritances fair among the children who will take over the business and those who will not. This can be accomplished through a buyout, life insurance policy, or capitalization of the business.

Estate Planning Is for Everyone

Read all three of these articles in the latest edition of the WealthCounsel Quarterly for free by becoming a subscriber today. You can also learn about digital innovation, prodigal heirs, no-contest provisions, assessing capacity, and building a long-term attorney-client relationship. Download the WealthCounsel Quarterly now.

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