We’ve finally arrived at a familiar place in the wealth transfer process: tools and techniques. Wills, executors, insurance, trusts, living wills, etc…all of these terms are familiar ones, but not necessarily comfortable ones. Whatever your level of comfort and familiarity with the tools and techniques, this is the area that most people think of when someone says, “estate planning.”
As we have been discussing different decisions in the estate planning process this week, this is the fifth decision: “What tools and techniques are best for me in the wealth transfer process?” This decision is highly dependent on the answer to the first four questions. If you have not decided on transfer, treatment, timing, and title, you will likely be very confused and frustrated by the variety of tools and techniques available to you when you go to an attorney to draw up a will.
In my opinion, the most common mistake in wealth transfer is “letting the tail wag the dog” by starting with the tools rather than starting with the bigger picture questions and answers. I am sad to think of how many widows have sat in an attorney’s office feeling mistreated by their departed spouse, who did his best to plan, but who did not really think about the personal implications of choosing a particular vehicle, such as a trust, in his will.
As I pondered this issue this week, I was reminded of the interaction of grace and the law in the Scriptures. As Galatians 3 says, the law is a “mediator” to lead us to knowledge of our need for the grace of God through Christ. In the same way, the specific tools and techniques for wealth transfer are meant to raise the questions that will lead us to a solid estate plan. I see too many people focus solely on the tools without opening their minds to the questions behind the tools…the four questions we’ve already explored.
So, what is a basic overview of the tools and techniques? For in-depth explanations, I would certainly refer you to a professional (an attorney, financial advisor, or life insurance advisor you trust) or to the book Splitting Heirs that Jeremy White and I wrote on this topic. However, you can begin to understand the tools and techniques in the following broad categories:
1) Your will and your executor: You will is a document that specifies where you are leaving assets or bequests to others. In it, you will specify an executor who will be responsible for assuming the time-consuming duties of working out the details of your will. Be careful who you choose for this position, as it can be a very arduous task. Also, if you have minor children, your will is where you will specify a guardian for them.
2) Life Insurance: One of the functions of life insurance is to create liquidity for your survivors upon your death. Often, an estate is mainly non-liquid, meaning that it is not readily available to be turned into cash. There are many types of life insurance (whole life, term life, universal life, etc.) and the best amount and vehicle for you will depend on many factors (such as the ages of your children, a spouse’s employment status, etc.). Life insurance is a very valuable tool that can be very helpful to survivors, so be sure to consider it, with the advice of a trusted professional, in your tools and techniques decision.
3) Trusts: There are many types of trusts that you can use, but the primary purpose of a trust is to put money into a separate entity (the trust) to mitigate the tax consequences after death. Trusts can also be used to divide money in an estate where there is a complicated family situation (such as a blended family) or to bequeath assets to younger inheritors who may not be ready for an entire sum of money all at one time. So, again, trusts are a vital tool in estate planning, but keep in mind that the main purpose of a trust is to help to soften tax consequences for your estate or to wisely provide for minors in a will.
4) Charitable Gifts: If you plan to leave large amounts of money to certain causes or charities, you will need to speak to your advisor about how best to handle that gift. There are a variety of tools (charitable remainder trusts, charitable lead trusts, private foundations, etc.). I would encourage you to speak with your financial advisor should you feel the need to use a tool to help with your giving as you plan your wealth transfer.
My hope is that this series of questions we have explored this month will open the door to a discussion in your home that will yield a solid and well-formed plan for wealth transfer. Again, for the tools and techniques decision, in particular, I would encourage you to get in touch with a professional who is trustworthy so that you can share your plan with them and receive up-to-date and informed advice.
May God’s peace encourage you as you pursue financial freedom and depend on His Truth.