Impediments to a well-planned estate, Pt. 4

By Connie Fontaine

The American College


There are a variety of common impediments that confront estate owners when planning their estates. Some of the more conventional errors include failures to account for inflation, liquidity and psychological impediments.

Failure to consider inflation

One impediment to effective estate planning that should not be underestimated is the rate of inflation experienced over the past few years. Even when inflation is relatively low, periodic reviews of an existing estate plan are necessary in order to stay informed about projected estate tax liabilities. These tax expenses can be affected by inflation through tax bracket creep. Even slow growth inflation can, over time, cause the value of a person's estate to be pushed into a higher estate tax bracket.

It is also necessary to review asset valuations, projected income from assets, and life insurance (in terms of constant dollars) to assure that an estate owner's family will continue to be adequately protected.

Aside from the potential for tax bracket creep, an inflated economic climate is likely to have a direct impact on all estates as the value of the dollar is eroded. Failing to consider inflation when projecting the adequacy of an estate 10, 20, or 30 years into the future will probably have a negative impact on an estate and, in a worse case scenario, could make it impossible to carry out the estate owner's ultimate goals and objectives.

Lack of liquidity

Lack of liquidity may also be a major problem to tackle in an otherwise well-planned estate. Three factors are particularly important in assessing liquidity needs in estate planning:
    (1) The amount and terms of debt of the estate owner
    (2) The projected estate tax liability
    (3) The type of assets that make up the estate
When an estate owner dies, the amount and terms of debt for which a decedent is personally responsible may change dramatically. The debt can reduce the actual assets or the net income stream that would be available to the beneficiaries. The same is true of the estate tax liability.

The types of assets owned by the decedent at the time of his or her death also affect the amount of cash available to the beneficiaries for their income needs. For example, when a closely held business is the primary estate asset and is the source of income to the decedent and family through the decedent's salary and bonuses, there is frequently a family cash shortage when the salary and bonuses cease. This monetary loss can create significant financial stress for a family that is already traumatized by the death of a family member.

If adequate planning has been done, salary continuation plans are a possible way to soften the financial shock of a breadwinner's death. Additional liquidity may also be available from retirement plans and life insurance proceeds.

If the business is to be sold, it is imperative that during the lifetime of the shareholder the arrangements for the sale be reduced to legally enforceable agreements (a buy-sell agreement, for example.) These agreements should be equitable to all parties, including both the persons who will continue the business and the decedent-shareholder's family.

If not thought about and planned for in advance, the estate might be forced to sell assets hurriedly to pay its bills or taxes. When this type of situation arises, assets may end up having to be sold under disadvantageous market conditions at greatly reduced prices.

Psychological impediments

I. Dealing with one's own mortality

Many people avoid making an estate plan because it encompasses planning for the distribution of their property items after their death. Individuals who cannot confront the inevitability of death often avoid the estate planning process. They are in denial. The Grim Reaper comes for us all.

Clearly, implementing an estate plan includes making provisions for the disposition of a person's assets after death. The planning process requires an individual to acknowledge the reality of his or her mortality.

Very few people can deal comfortably with thoughts of their own death. There are many sophisticated and successful professionals who are very comfortable in the high-pressure atmosphere of finance and international business but who are so distressed when attempting to deal with the inevitability of death and/or the loss of control, that they never implement a cohesive estate plan.

In this case, it is the estate owner's family who ultimately suffers when their standard of living becomes impaired, when the owner dies, or when the family tries to impose some semblance of order on an estate in disarray.

Estate planners should make every reasonable effort to work with clients who are avoiding or reluctant to confront the inevitable. They should be aware of the sensitivity necessitated in handling the difficulties presented in this situation.

One possible suggestion for assisting a client to overcome this obstacle is to stress that estate planning is purely precautionary, and prudence requires that a person be prepared for various occurrences. It is also important to educate individuals as to the consequences of failing to do estate planning. This includes the very real possibility that an unplanned estate may cause the dissolution of the achievements of a lifetime devoted to accumulating, protecting, and preserving wealth.

II. Procrastination

While procrastination may be another indication that individuals are grappling with their mortality, a more common reason for this delay is the feeling that planning for the distribution of an estate is a task so large that it is impossible to achieve (sort of like cleaning out the garage, attic, or basement.) An individual can become overwhelmed and simply do nothing, or start planning and then stop if the effort becomes too much.

In this circumstance, it may be necessary for the planner to accept a significant part of the responsibility for completing the estate plan and to divide that portion of the task that must be done by the client into manageable chores.

Although there are numerous and varied obstacles facing individuals who wish to have a well-planned estate, it is important for people to realize that all of the impediments discussed in the last several columns can be successfully addressed. With proper planning, the final outcome for estate owners is generally much more beneficial than it would be with no or little planning.

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