Focus and Law

Reducing risk factors in trusts and estates planning

Ask plenty of questions to get the right answers

October 15, 2012
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Planning for your family’s future is one of the most important jobs you have. Unfortunately, the average person doesn’t know all the intricacies and options for trusts and estates planning, which can leave individuals or their families in a vulnerable position.

James Steffel, a partner with Warner Norcross & Judd LLP, said there are ways to reduce the risks of hiring a bad trusts and estates planner or creating a less than optimal plan.

To begin with, Steffel recommends not going to the Internet first to search for planners. Instead, he suggests gathering recommendations from people you know — and not just people in your age range but also people who are older.

“What would be even better is if you got a recommendation not only for what they did in the planning, but what happened when they needed to have it administered,” Steffel said. “So not only were they happy with the planning that occurred, but they were happy with how the trust or estate got administered. Now that is a pretty solid recommendation. Then, what you would do is, take the names that were recommended, and now you can go look those people up on the Internet and see what they really do.”

Steffel said it is also important to look at the percentage of time the individual actually spends on trusts and estates.

“If you are having an operation on your ankle, are you going to want to go to an orthopedic surgeon that only operates on ankles 10 percent of the time, or 100 percent of the time?” he asked.

Steffel said that while smaller shops may provide quality service, from a risk-reducing standpoint a larger firm has some advantages over a smaller firm in terms of the amount of research that can be done, the financial backing available, and the regulations and compliance overview that occurs.

“If you go to a very large law firm, and I’m not self-promoting here, but if you go to a very large law firm that has several people that do this type of work, that spend virtually 100 percent of their time doing that work, there is inherently less risk than hiring somebody that is a one-person shop that might do this only 20 percent of the time. And, who knows what the firm’s financial backing is?”

He said this holds true for the administration side of trusts and estates, as well.

“If it’s a large bank and they goof up, there is certainly money to stand behind that problem,” Steffel said. “If you decided to hire a one-man shop who says (it) can do it for half the price the bank can do it for, and you know nothing about their finances, you’re obviously putting yourself at more risk of there being a problem than you would be if you went to a place that you know to be financially sound.

“That doesn’t mean that you can’t get extremely high-quality representation out of a small shop. All I’m talking about is reducing risk and how much more background research you maybe need to do on that small shop than you need to do on the big shop.”

Once you have determined a few reputable firms, Steffel recommends calling them and asking the following questions:

**How do they charge?

**How much of their time is spent on trusts and estates?

**Do they use powers of appointment?

**Do they do generation skipping?

**Do they allow the beneficiary to also be the trustee?

Steffel said the last three questions would really differentiate the experience and quality of planning someone is likely to receive.

Power of appointment grants an individual the right to make changes to a trust and estate plan after someone has passed away.

For example, Steffel said that if a spouse dies, the surviving spouse might have a reason to want to make changes to the original plan, and a power of appointment would give that person the ability to do that.  It also allows for strict stipulations, including preventing unintended beneficiaries from being added — such as, children from a second marriage.

Generation skipping is a way to create a layer of protection for intended beneficiaries and can be very important.

“Instead of giving your kids’ shares outright to them, you hold it in trust for their life,” Steffel said. “And you can actually make them be the person that is in charge of the fund if you carefully craft the standards upon which they are allowed to give themselves funds.

“If you structure that properly, it not only will shelter that from creditors, but let’s say your kid is a surgeon and he or she is going to get sued … and you’d like to make sure that the money you give them never goes to that person who sues them. If they get it outright, that’s going to be subject to any claim. If it’s properly held in trust for their life, it’s there for their whole life.

“If you think they can do that for themselves, you’re wrong because once they get it, they can never put it in a protective arrangement the way you can.”

Steffel said that tax planning also is an important component of trusts and estates. He said that inadequate tax planning could cost millions. Currently, in 2013, estate taxes will apply, at a rate of 45 percent, to all estates of $1 million or more. This is a change from previous years where it applied at a rate of 35 percent to estates of $5 million or more.

“There are numerous tax-planning techniques with numerous levels of risk, complexity and costs,” Steffel said. “With proper planning, the more wealth you have, the more taxes you can save. The differences between excellent and mediocre planning are huge.”

Additionally, knowing what information you should be getting is an important way to protect your trusts and estates plan. Steffel said that in most situations, beneficiaries have the right to see the books and how money is being invested.

“There are all kinds of rules that say, not only do they have to give itemized accountings to the beneficiaries, but they have to make sure they are investing it in a diversified way so they are not putting the investment at risk. They’ve got to make sure that assets are protected by being properly insured if they’re holding insurable assets.

“They’ve got a lot of legal responsibilities. The question is whether they are following them or not.”

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