Who Should Your Client Name as a Beneficiary?

Americans pay hundreds of billions of dollars in life insurance premiums per year. Most policyholders will never see a payout themselves. Instead, it will go to their loved ones to provide for them when the policyholder dies. 

Life insurance benefits and claims totaled $797.7 billion in 2022, including more than $88 billion in death benefits, according to the Insurance Information Institute. The typical life insurance payout is approximately $168,000. 

If a policyholder designates a beneficiary on their life insurance policy, the death benefits are not typically part of a decedent’s estate that goes through the probate process because they pass directly to beneficiaries. However, the potentially large cash value it can provide makes it central to estate planning and requires careful consideration about how to structure the beneficiary designation. 

Naming a Spouse or Children as Beneficiaries

The most common beneficiaries of a life insurance death benefit are a surviving spouse and/or children. 

Life insurance death benefits are typically protected from creditor claims for policyholders’ debts. But once the designated beneficiary receives the death benefits, the beneficiary’s creditors can go after the funds to satisfy the beneficiary’s debts—even debts owed jointly with the deceased policyholder (for example, an outstanding loan or credit card debt where the policyholder and the spouse are co-signers). This is true whether the beneficiary is the policyholder’s spouse, child, or other loved one.  

The death benefit of the life insurance policy may also be open to claims of the named beneficiary’s spouse. If a surviving spouse beneficiary remarries or a child beneficiary divorces, for example, the death benefit proceeds received by the beneficiary and put into one of their accounts or investments could end up being categorized as marital assets and, therefore, subject to equal division in the event of a divorce. This outcome could countermand the intention of the policyholder. 

If no beneficiaries are named on an insurance policy or if the beneficiary named is the policyholder’s estate, then a probate estate will likely need to be opened to administer and transfer the death benefit to the policyholder’s heirs or beneficiaries. Once the probate estate has been opened, the deceased policyholder’s creditors may have an opportunity to claim the death benefit before the funds are distributed to the heirs or beneficiaries of the estate. 

Minor child beneficiaries present challenges as well. Insurance companies cannot pay insurance proceeds directly to minor children. An adult will usually have to be appointed to manage the funds until the child reaches the age of majority. Depending on your state, this may involve a court proceeding and annual reporting requirements that cost money and can delay the payout. 

Some life insurance policies allow a custodian to be assigned to a minor child beneficiary without needing a probate court appointment. A custodian manages the money for the minor child until they reach legal adulthood, when the assets are turned over to them. 

Naming a Charity as Beneficiary 

A life insurance policy can be a way to make a charitable gift at the end of life. This option might appeal to a client who purchased a policy to protect a spouse or children who no longer need it, to complete payment of a mortgage, tax, or other debt that is no longer a concern, or to cover some other contingency that no longer requires the funds a life insurance policy would have provided. 

A life insurance policy can also be purchased for the express purpose of charitable giving. In addition to taking out a new policy to benefit charity, a charitable recipient can be named as a beneficiary on an existing policy to receive all or part of the policy proceeds. Other options include transferring ownership of a policy to a charity and gifting dividends from a life insurance policy to a charity. 

Each of these options can provide tax benefits. Depending on how a life insurance gift is made, the cash value of the policy, the cost of premiums paid, or the value of dividends may be deducted. 

Creating a Trust for a Loved One

Naming individuals as life insurance beneficiaries can provide convenience and flexibility for beneficiaries because the money passes to them quickly and easily outside of probate. The beneficiaries only need to file a claim with the life insurance company and select how they want the death benefit to be paid (usually in periodic payments or a lump sum). 

However, there are downsides to setting up a death benefit in this way. The policyholder ultimately loses control over how the insurance proceeds are used. They may have intended to protect their loved ones financially—but if they are deceased and the funds are in the hands of their beneficiaries with no controls or restrictions, can they ensure that the benefit is used in accordance with their wishes?  

They can. Policyholders can control the death benefits of their life insurance policy by naming a trust they have set up as the policy’s beneficiary and allowing a trustee to manage the death benefit on behalf of trust beneficiaries, such as a spouse or children. This arrangement allows the client to provide instructions about how the money should be used and managed. 

A trust can be useful for leaving money to underage or special needs children. It can also ensure that a disabled beneficiary remains eligible for government assistance or keep a young adult from spending the funds all at once. Insurance proceeds held in trust are also protected from creditors and exempt from probate. 

Advising Clients on Life Insurance 

About 90 million American families rely on life insurance for financial protection and retirement security. However, recent survey data indicates that more than 100 million Americans are facing a life insurance coverage gap, presenting an opportunity for advisors to steer them toward these products. 

As a value add, advisors can explain how life insurance fits into an estate plan and walk them through the different options for naming beneficiaries. These discussions could open new revenue streams, such as establishing trusts and charitable donations. 

Please contact our team for a primer on life insurance and estate planning and how our practices can benefit each other. 

Common Life Insurance Mistakes in Estate Planning

With few exceptions, almost every client should have life insurance, just as everyone should have an estate plan. 

But simply having a policy—and a plan—is not enough. Both life insurance policies and estate plans are prone to mistakes or oversights that can undermine their effectiveness. And those mistakes or oversights can be compounded when life insurance is part of a client’s estate plan. 

Mistake #1: Not Having Enough Coverage

The need for life insurance in the United States grew to a record-high level in 2024, with 102 million adults saying they need—or need more—life insurance, according to an annual survey from LIMRA and Life Happens, two nonprofit industry trade associations. 

Survey results from a prior year indicated that 44 percent of households would encounter major financial difficulty within six months if the family lost its primary wage earner. Life insurance coverage should be sufficient to sustain a household’s current living standard. Household spending varies by age group and tends to drop with age, but it does not consistently decline until after age 65. Many households see a jump in spending at around age 55. 

Life insurance calculators can roughly estimate how much coverage is needed. However, there is no substitute for a comprehensive review of a client’s situation, insurance needs, and estate planning goals by all the client’s trusted advisors. By collaborating, we can make sure that our mutual clients are getting the coverage they need to meet their unique situations and goals.

Mistake #2: Relying on Employer or Group Insurance

While group life insurance offered through work or a professional organization is often cheaper than an individual policy, it may not provide enough coverage for most families. There is also the risk that the policyholder will lose their policy if they quit their job, retire, are fired, or sever ties with the sponsoring organization. 

Clients should be encouraged to take advantage of a group insurance policy if offered but cautioned not to rely on it exclusively. As part of your discussion with the clients, consider asking them about the maximum death benefit of their group policy so you can determine the coverage gap amount. 

Mistake #3: Not Listing a Beneficiary

Life insurance policies with a designated beneficiary are not governed by a client’s will (unless the beneficiary is the policyholder’s estate). It is up to the clients to name a policy beneficiary (or beneficiaries) to whom they want to receive the death benefit. 

If an individual policyholder does not name a beneficiary, the death benefit proceeds could become part of the policyholder’s estate—possibly subjecting the beneficiary to the delays and expenses of probate court. 

For group insurance policies with no named beneficiaries, the terms of the policy may include an automatic beneficiary order, such as the policyholder’s spouse, followed by children, parents, and the estate. Not naming a beneficiary and relying on the terms of the life insurance policy could result in the proceeds being distributed to the predetermined beneficiaries, which may not be in line with the policyholder’s estate planning goals. This is also true if the death benefits fall to the policyholder’s estate and the policyholder dies without a will. If the policyholder had a will or a trust, the distribution of death benefits from the estate follows the plan established in their estate plan. 

As a practical note, we advise all clients to inform the people they designate as beneficiaries of their life insurance policies and, ideally, give them contact information for the claims department of the plan provider. Life insurance proceeds sometimes go unclaimed because the family has no idea a policy exists. 

Mistake #4: Naming a Minor Child or Special Needs Beneficiary

Life insurance death benefits can be a lifeline for minor children and special needs beneficiaries. However, naming a minor or disabled beneficiary can work counter to the goal of providing them with financial security. 

Life insurance companies cannot pay death benefits directly to minor children. To avoid any legal complications and delays that can arise from this obstacle, a client can name a trust with a trusted adult, such as a spouse or partner, to act as the trustee of the trust, to manage the death benefit for the child according to the client’s wishes. The court may have to get involved if the client names a minor child as a beneficiary. 

Two main issues with naming a disabled or special needs beneficiary on a life insurance policy are that they may not have the capacity to manage the funds responsibly, and the death benefit amount could disqualify them from means-tested government assistance programs. A third-party special needs trust can be created to hold insurance death benefits for those with disabilities. This type of trust will help the special needs beneficiary retain their public assistance eligibility while covering expenses not covered by programs like Medicaid or Social Security. 

Mistake #5: Not Updating Beneficiaries

Out-of-date beneficiary designations are a common—and potentially costly—life insurance mistake. 

Clients should update beneficiaries anytime there is a major life event, such as a marriage, divorce, birth, or death. Remind them that the insurance beneficiary forms take precedence over their will

Some states have “revocation upon divorce” statutes that automatically revoke a spouse as a beneficiary in the event of a divorce. In such states, contingent or successor beneficiaries become primary beneficiaries automatically without the policyholder needing to update their beneficiary form. But if the policy does not name a contingent beneficiary—or the successor beneficiary has predeceased the policyholder—the insurance proceeds could pass to the estate and go through probate, subjecting the proceeds to unnecessary and sometimes substantial costs. 

Both primary and secondary beneficiary designations should be reviewed every three to five years to ensure a death benefit goes to the right person. Absent a major life event, the client could just change their mind, for personal reasons, about who should benefit from the policy. They might also decide to switch the beneficiary from an individual to a charity or a trust. Also, there are times when insurance plan providers are bought by or merged with new plan providers or when an employer may change the company that provides their group plan life insurance policy. In these situations, the original beneficiary designations may be wiped out, requiring the policyholder to designate their beneficiaries anew.

Changing a beneficiary designation is usually a simple process. Still, community property states may require the policyholder to name their spouse as the primary beneficiary, designated to receive at least 50 percent of the benefit. In these states, written spousal consent may be required to name somebody other than the spouse as a beneficiary. 

Enhance Your Advisory Services with Estate Planning 

Our job as advisors is to remind clients that planning is not a one-time event. It is a continual process that needs to be revisited and refined over the years. 

It is no different for our practice area. The more we learn from each other, the more we can offer cross-disciplinary services that address all aspects of our clients’ futures. 

Please contact us to set up a time to discuss specific estate planning strategies and how they can fit into your current offerings. 

Lessons We Can Learn from Famous Mothers and Their Estate Plans

Gloria Vanderbilt: No Trust Fund Kids for Her

A tenet of the American dream is that children grow up to earn more and have a better standard of living than their parents. Traditionally, upward mobility in America is achieved through hard work and the growth of the economy. Intergenerational wealth transfers are also widespread, with around 2 million households each year receiving an inheritance or a substantial gift, according to a Federal Reserve report.1 Those transfers are set to grow over the next couple of decades as baby boomers pass down $84 trillion to the next generation in what is being called “The Greatest Wealth Transfer in History.” 2

But not all parents are committed to leaving an inheritance to their children. Some, including Gloria Vanderbilt, believe that kids should make their own money and earn their own success in life. 

Vanderbilt Heiress Makes Good on “No Trust Fund” Promise

Gloria Vanderbilt, the great-great-granddaughter of railroad and shipping tycoon Cornelius Vanderbilt, inherited a trust fund worth an estimated $2.5–$5 million in 1925 (close to $35–$70 million today). She was worth an estimated $200 million at the time of her death in 2019. 

In a 2014 radio interview, Gloria’s son, CNN host Anderson Cooper, said she made it clear to her three children that they should not expect a trust fund from her. Cooper called inheriting money a “curse” and an “initiative sucker” and questioned whether he would have been so motivated if he felt like there was a “pot of gold waiting for me.” 3

It is a fair question to ask, given his family history. Cooper’s grandfather, Reginald Vanderbilt, was a reputed gambler who had squandered most of the family fortune by the time he died in 1925 and left the remainder to Gloria. 

Yet as Cooper pointed out, his mom, who had a successful career in the fashion industry, made more money than she inherited. Gloria started a denim business in the 1970s that was reportedly worth $100 million. In a 1985 interview with the New York Times she said, “I’m not knocking inherited money, but the money I’ve made has a reality to me that inherited money doesn’t have.”4

Although Cooper ended up receiving $1.5 million from Gloria’s estate, his net worth prior to his inheritance was thought to be more than $100 million, so he can hardly be labeled a trust fund kid. But while he did not inherit a fortune, he does appear to have inherited his mother’s work ethic. In addition to her denim line, she worked as a model, an actress, and an artist—all while balancing her duties as a mom. 

“We believe in working,” Cooper said when discussing his mother’s trust fund stance.5

Lessons Learned from the Vanderbilt Heiress

Gloria Vanderbilt did not go the route of super-rich parents like Warren Buffet, Bill Gates, Mark Zuckerberg, and Michael Bloomberg, who have vowed to donate their fortunes to charity. However, she did make good on her promise of not leaving a trust fund to her kids, which studies suggest can be a wise choice. 

Research from the Williams Group wealth consultancy found that 70 percent of wealthy families lose their wealth by the second generation, and 90 percent lose it by the third generation.6 A survey by U.S. Trust found that only 42 percent of high-net-worth individuals have a high degree of confidence that the next generation is financially responsible enough to handle an inheritance. 7

The Vanderbilt family presents an interesting case study—and counterpoint—to this familiar narrative of heirs squandering the family fortune. 

By the time the Vanderbilt fortune built by Cornelius, a man richer than Bill Gates in his day, reached Gloria four generations later, it was nearly gone. But despite receiving a trust with enough remaining funds to live comfortably on, her inheritance did not dull her drive for hard work and achievement. Gloria’s son Anderson Cooper also had a strong work ethic from a young age. He interned at the CIA while studying at Yale and went on to become one of the most recognizable faces in media. 

Experts say the main reason why fortunes are squandered is because those who create the initial wealth do not pass on detailed instructions or impose guidelines on how heirs should spend it. Attitudes towards wealth need to be shaped and inculcated. This can be done informally—say, by teaching kids sound money habits and providing a good example—and formally, such as through trusts that specify how and when the money can be used. 

Arguably, not leaving an inheritance can be a great motivator for loved ones to find their own path forward. Money cannot buy happiness, and having a trust fund or substantial inheritance does not guarantee that heirs will be successful. 

Parents know their children best. They also know that what is good for one kid may not necessarily be good for the others. While one child may manage their inheritance independently without issues, another may need safeguards and incentives. 

Wealth management and estate planning go hand in hand. When advising your clients how to achieve their financial objectives for the next generation, you may suggest that they could benefit from advice about how to structure a plan in ways that help preserve generational wealth. To collaborate with our estate planning attorneys on a wealth management strategy for your clients, please get in touch. 

Aretha Franklin: Too Much Estate Planning

Aretha Franklin was a larger-than-life figure to her many adoring fans during a music career that spanned nearly 60 years. Over that time, she put out 38 studio albums and 6 live albums. The Queen of Soul also penned two wills that became the subject of considerable controversy after her death and showed that no matter how famous you are, your final wishes could come down to state law if you are not proactive about estate planning. 

Two Wills Are Not Better Than One

Aretha Franklin, the commanding voice behind such hits as “Respect” and “Think,” was thought to have passed away in 2018 without voicing her views on how her estate should be divided among her four sons, seemingly leaving it up to state law and a judge to decide. 

But when Franklin’s niece agreed to serve as personal representative of the estate and began going through the singer’s Michigan home, she discovered not one but two handwritten wills—one from 2014 found in the couch cushions and a second from 2010 found in a locked cabinet. 8

The documents contained key differences about the division of real estate, personal property, and music royalties among her sons, and the sons disagreed over which version should control the estate. Further complicating matters, both wills had detailed lists of assets, but neither was prepared by a lawyer or listed witnesses. 

Her sons ended up squaring off in probate court over which of the discovered wills expressed their late mother’s true intentions at the time of her death. Following a two-day trial, a jury put the five-year—and at times combative—controversy to rest when it determined that the 2014 document should serve as the will. 

Lessons Learned: R-E-S-P-E-C-T the Estate Planning Process

Aretha Franklin avoided dying intestate (meaning without a will) by handwriting a will. But her estate planning errors led to a situation that was just as complicated—and just as easily avoided. 

Clients can learn these valuable lessons from Franklin about what to do—and not do—when creating an estate plan: 

  • Let loved ones know where documents are located. A will must be presented to the court and verified before it can take effect. If it cannot be located, it is essentially useless. Clients need to make sure loved ones know where their will, along with their additional estate plan documents like trusts, powers of attorney, and life insurance policies, can be found. Ideally, they should be kept somewhere secure, such as a bank safe deposit box, a fireproof safe, or a filing cabinet, or online in an encrypted cloud. Anyone needing access to the documents should also be given access codes. Document copies can be given to the estate planning attorney, local probate court, executor, or a trusted friend or family member as a fail-safe. 
  • Do not keep more than one version of documents. Only one will is admissible to probate. The most recent version of a will or other estate planning document typically prevails over an older one, as it did in Franklin’s case. If new documents are created, clients should consider destroying the old ones to alleviate confusion. 
  • Handwritten wills may be okay but are not ideal. Handwritten wills are considered valid in more than half of the states, including Michigan. However, they must meet certain criteria, such as bearing a signature and setting forth the material issues (what the person owns and the individuals they want to receive those accounts and property) in the person’s own handwriting. Some states, including Indiana, still require witnesses even on handwritten wills. Disputes over a handwritten will’s validity can be avoided by working with an attorney who can ensure that the document is legally prepared and executed. 
  • Make your intentions clear. Having more than one will raises questions about which should take precedence. But in some cases, even a proper will can be superseded by, for example, a beneficiary designation on a retirement account or property owned together by two or more people in joint tenancy. To prevent discrepancies, confusion, and conflicts, paperwork should be in alignment across estate planning documents. 

How We Can Help You Help Your Clients

It cannot be emphasized enough that estate planning is not just for the rich and famous. You may convey a similar message to your clients when discussing an asset management plan. In our celebrity-driven culture, figures like Aretha Franklin can serve as a cautionary tale about what can happen when a plan is left to the last minute or not completed under the guidance of an experienced estate planning attorney.

One of the best gifts a client can leave their family is a professionally prepared estate plan that leaves nothing to chance or speculation. Clients should know that a missing, incomplete, or unclear estate plan can lead to conflicts between heirs that necessitate court intervention and drain estate assets.

The more you understand estate planning and how it fits into a wealth management strategy, the more you can build client trust and earn repeat business. To begin a collaboration with our estate planning attorneys, please reach out to schedule a meeting. 

Lucille Ball: Dangers of Being the First to Die

I Love Lucy star Lucille Ball passed away 35 years ago. Decades after her death, important lessons can be learned from a court battle over some cherished heirlooms between Ball’s daughter and the widow of Ball’s second husband. 

Remarriage can pose emotional as well as legal challenges. When a client remarries, they need to carefully consider whom they are leaving their personal property to, especially if the personal property at issue is from a previous spouse. While monetary inheritances can be valuable, personal property is often invaluable to surviving family members and can spark fierce disagreements over who is the rightful heir. 

No Laughing Matter: The Legal Fight over Lucille Ball Memorabilia

Actress and comedy icon Lucille Ball had two children with actor Desi Arnaz: Lucie Arnaz and Desi Arnaz Jr. 

The couple divorced in 1960, and Ball married comedian Gary Morton in 1962. Following her passing in 1989, her estate was split between Lucie, Desi Jr., and Morton. 

After Lucy died, Morton married professional golfer Susie McAllister. They remained married until Morton’s death in 1999, at which point McAllister inherited items that had belonged to Morton and Ball, including love letters, photos, and a Rolls Royce. McAllister also ended up in possession of several of Ball’s personal items. Among them were her personal address book, portable backgammon boards, and lifetime achievement awards. 

Ten years after Morton’s death, McAllister put the items up for auction as she prepared to remodel her home. And that is when the trouble started between McAllister and Lucie. 9

Lucie asked that certain items be returned to her and threatened legal action to stop the sale if they were not. McAllister then sued Lucie and sought a judge’s ruling allowing the auction to proceed. In another twist to the case, the two women agreed that the possessions were left to Lucie in Ball’s will, but McAllister contended in her lawsuit that Lucie never claimed them from Ball’s estate, so they passed to McAllister. 

A judge ultimately ruled in favor of Lucie and said that the auction could be stopped—but only if Lucie posted a $250,000 bond. Lucie could not afford it, but her legal team reached an agreement with the auction house to have the lifetime achievement awards returned. The other items went up for sale. 10

Lessons Learned from the Lucille Ball Estate Kerfuffle

It is unclear why Lucie might have abandoned the personal possessions her mother allegedly left to her. There do not appear to be any media reports disputing this claim by McAllister. But if true, it raises the first takeaway from the legal battle: your clients need to claim any assets left to them as an estate beneficiary. Unclaimed inheritances pass to the next beneficiary in line—in this case, presumably Gary Morton, who then passed the forfeited items to McAllister following his death. 

Morton, however, is not blameless in this situation. He left items to McAllister that were originally intended for Lucie. While he may not have explicitly known the intentions of his late wife regarding her prized possessions, he probably should have known that they were better off in the hands of his stepdaughter. 

According to the auction house, McAllister kept the items for more than ten years out of respect for Ball and Morton. But she can hardly be blamed for wanting to eventually clean house and be rid of them. 

The second takeaway from this legal battle, then, is that if your client has remarried and has personal property from a previous spouse, they need to give due consideration to who should inherit it. Morton might have asked himself what McAllister would do with love letters between himself and Ball other than sell them, or why his new wife would want Ball’s personal address book or backgammon boards. The whole messy legal battle could have been avoided had he asked himself a few simple questions during the administration process. 

Advisors Help Clients Avoid Common Mistakes

Part of being a good advisor is knowing what questions to ask your clients. This perspective is honed through years of hands-on experience, trial and error, and learning from the mistakes of others. 

Advisors working in different specialties that overlap can also learn from one another, synergizing their knowledge to deliver the best possible client experience, to the mutual benefit of all parties. 

Schedule a meeting with our estate planning attorneys to find out how we can help you provide more value to your clients.

  1.  Laura Feiveson & John Sabelhaus, How Does Intergenerational Wealth Transmission Affect Wealth Concentration?, FEDS Notes (June 1, 2018), https://www.federalreserve.gov/econres/notes/feds-notes/how-does-intergenerational-wealth-transmission-affect-wealth-concentration-20180601.html.
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  2.  Jennifer Wines, How Might the Great Wealth Transfer Change Society?, Kiplinger (Dec. 5, 2023), https://www.kiplinger.com/retirement/how-might-the-great-wealth-transfer-change-society.
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  3.  Michelle Singeltary, Gloria Vanderbilt Reportedly Did Not Leave Her Heirs Much Money. Maybe You Should Follow Her Lead., Wash. Post (June 24, 2019), https://www.washingtonpost.com/business/2019/06/24/gloria-vanderbilt-is-reportedly-not-leaving-her-heirs-much-money-maybe-you-shouldnt-either.
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  4.  Carol Lawson, Gloria Vanderbilt: Fortunes Good and Bad, N.Y. Times (Apr. 20, 1985), https://www.nytimes.com/1985/04/20/style/gloria-vandrbilt-fortunes-good-and-bad.html.
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  5.  Singeltary, supra note 3.
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  6.  See ​​Rhymer Rigby, Disinheriting Your Children Might Be for Their Own Good, Fin. Times (Oct. 14, 2019), https://www.ft.com/content/eb4a390a-d926-11e9-9c26-419d783e10e8.
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  7.  U.S. Trust, U.S. Trust Insights on Wealth and Worth: The Generational Collide 14 (2017), https://www.truevaluemetrics.org/DBpdfs/ImpactInvesting/UST-BoA-Wealth-Worth-Overview-Broch-2017.pdf.
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  8.  Ben Sisario & Ryan Patrick Hooper, Four Pages Found in a Couch Are Ruled Aretha Franklin’s True Will, N.Y. Times (July 11, 2023), https://www.nytimes.com/2023/07/11/arts/music/aretha-franklin-will-couch.html.
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  9.  Lucille Ball Memorabilia from the Estate of Gary Morton—Including Love Letters, Rolls Royce, Awards and Artwork—at Auction in Beverly Hills, Heritage Auctions (July 6, 2010), https://news.cision.com/heritage-auctions/r/lucille-ball-memorabilia-from-the-estate-of-gary-morton—including-love-letters–rolls-royce–awards-and-artwork—at-auction-in-beverly-hills,g502294.
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  10.  Jason Pham, Here’s Where Lucille Ball’s Kids Are Now & How Much They Inherited after Their Mom’s Death, Yahoo! Fin. (Mar. 7, 2022), https://finance.yahoo.com/news/where-lucille-ball-kids-now-133309434.html.
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Assisting Clients in Decoding the Generation-Skipping Transfer Tax  

Optimize Generational Wealth Transfers with These Insights 

Generation-Skipping Transfer Tax 101 

Many of you are likely familiar with estate and gift taxes. However, dealing with the generation-skipping transfer (GST) tax comes up less often since it usually only affects ultra-wealthy clients.   

Estate planning attorneys, financial planners, and tax advisors must understand the GST tax and learn how to avoid it to help affluent clients accomplish effective planning. Explaining the GST tax to clients is easier if you share examples of how it might impact their particular situation. It is also vital to consider unique family dynamics, financial goals, and values when recommending the best tax strategies to distribute generational wealth. 

What Is Generation-Skipping Transfer Tax? 

The government collects federal estate taxes to generate revenue when wealth is passed down to subsequent generations. When people die, they usually leave their money first to their spouses, then to their children, then to their grandchildren, and then to more distant relatives. At each passing of generational wealth, the government collects an estate tax.  

Wealthy families found a way to avoid estate tax by skipping a generation and transferring wealth directly to grandchildren and great-grandchildren, allowing them to pass down more wealth to future generations. Estate taxes were avoided when the skipped generation (in our example, the children) died because the children never owned the money or property.  

The government responded with legislation in 1976 and again in 1986, attempting to eliminate the transfer tax advantage of skipping a generation by imposing a GST tax when a skip occurs, ensuring that large estates still pay estate tax at each generation.   

The GST tax rate is currently 40 percent (the same as the highest federal estate and gift tax rate) so the tax burden on high-net-worth individuals can be substantial. Luckily, there is a GST exemption amount of $13.6 million for individuals in 2024 (the same as the federal estate and gift tax exemption) that can be used when clients want to make gifts or leave an inheritance that would otherwise be subject to the GST tax. This means that only large estates are truly impacted by the GST tax. 

Who Are the Parties Involved in a Generation-Skipping Wealth Transfer? 

There are typically three parties involved in a generation-skipping wealth transfer: 

  • The transferor: the person making the wealth transfer to an individual or a trust  
  • The skip person: the person receiving the money or property, who must be two or more generations removed from the individual making the transfer or is at least 37 ½ years younger than the transferor; a skip person may also be a trust in some instances 
  • The non-skip person or the skipped person: the generation between the individual transferring wealth and the one receiving it 

Why Should Clients Be Mindful of This Tax? 

Clients with substantial estates who are considering making sizable gifts or bequests to skip persons need to work with experienced professionals so they understand the tax consequences of these gifts or bequests, and so they can develop a strategy to properly utilize their GST tax exemption. 

The earlier you can get your client started, the better the results. It will take time and collaboration with other professionals to ensure the best possible outcome. Additionally, as with any type of estate planning, you will need to remind the client about regular reviews for updates to their plan due to changing circumstances. 

Partnering with Professionals to Align Legal and Tax Planning Strategies 

Working together, we can provide our clients with comprehensive advice, ensuring that legal, financial, and tax implications are all considered in their estate planning strategies. This will enhance the overall quality of the service and expertise your clients receive. We welcome the opportunity to partner with you to develop strategies to assist our mutual clients.

Let’s Do the Math: How Does the Generation-Skipping Transfer Tax Work? 

The generation-skipping transfer (GST) tax, is a tax assessed on gifts from one person to another person in two or more generations younger, or someone who is at least 37 ½ years younger (also known as a skip person). Although not everyone will have to address this as part of their estate plan, if you have clients who are looking to make a large gift or leave a large inheritance to a skip person, it may be beneficial to see how the math works in this type of situation.

Generation-Skipping Transfer Tax Rate  

The federal GST tax rate matches the highest federal estate tax rate, currently set at 40 percent. For high-net-worth individuals, effective GST tax planning is crucial in managing combined estate, gift, and GST tax burdens. 

Generation-Skipping Transfer Tax Exemption  

Individuals can transfer a specific value of money and property to skip persons, either during their lifetime or after death, before triggering the GST tax. This exemption equals the federal estate and gift tax exemption amount ($13.61 million in 2024). Be aware, there is no portability for the GST tax exemption. Therefore, clients need to use it or they lose it.   

Exceptions to the Generation-Skipping Transfer Tax  

Your client may already have a trust. If so, certain irrevocable trusts established before September 25, 1985, are grandfathered and exempt from the GST tax provisions in section 26.2601-1(b)(1) of the Treasury Regulations. Modifications or additions to these trusts can jeopardize the exception. Additionally, gifts for educational or medical expenses to skip persons, such as health and education exclusion trusts (HEET), are excluded from GST tax application. 

Applicable Fractions and Inclusion Ratios 

To understand how the GST tax will affect your client’s estate, you need to do some math. The GST tax calculation relies on the inclusion ratio, indicating the extent to which a transfer is subject to GST tax. This ratio is determined by the applicable fraction, considering the individual’s GST tax exemption. An inclusion ratio of one means the direct skip or trust is fully taxable. Any number between zero and one indicates the transfer is partially subject to GST tax.  

The amount of the GST tax exemption allocated to the transfer is divided by the value of the property involved in the transfer. The fraction is rounded to the nearest one-thousandth (.001) and looks like this:  

The next step is determining the inclusion ratio by subtracting the fraction from the number one. Depending on the ratio, the trust is either fully exempt, fully taxable, or partially taxable.  

Fully Exempt Trust 

Let’s say your client creates an irrevocable trust for the benefit of a grandchild and their descendants in 2024, when the entire GST tax exemption of $13,610,000 is available and allocated to the trust.  

If your client transfers $13,610,000 (or less) to the trust, the inclusion ratio would be zero: 

1 – (13,610,000 / 13,610,000) = 1 – 1.000 = 0 

The trust would be fully exempt from GST tax. 

Fully Taxable Trust 

Now, let’s assume that your client had previously used their GST tax exemption and there was none available to allocate to the grandchild’s irrevocable trust, the inclusion ratio for this transfer would be one: 

1 – (0 / 13,610,000) = 1 – 0 = 1 

The trust would be fully subject to GST tax. 

Partially Exempt Trust 

Partially exempt trusts have a portion of money or property subject to the GST tax, while another portion may qualify for an exemption.    

If your client puts $15,500,000 in the irrevocable trust, and their entire exemption is available, the inclusion ratio would be: 

1 – (13,610,000 / 15,500,000) = 1 – .878 = .122  

The applicable fraction is .878, and the inclusion ratio is .122. The trust would be partially subject to GST tax. When distributions are made to the grandchild, there will be a tax due. To calculate how much will be owed, we first must know what the tax rate is at the time of the distribution. For example, if the rate is 40 percent, 

40 percent x .122 = 4.88 percent

If the grandchild receives a taxable distribution from the trust of $125,000, the GST tax would be $6,100.

For gifts or bequests made directly to the skip person, the formula works similarly, the inclusion ratio is multiplied by the GST tax rate in effect at the time of the transfer.

It Takes a Team 

We understand that the GST tax can be complicated at times. By working as a team, we can assist our clients in planning and carrying out their wishes.

What You Need to Know about the Generation-Skipping Transfer Tax Returns 

If you have clients with significant wealth, things like estate, gift, and generation-skipping transfer (GST) taxes need to be discussed. If a client wishes to make a gift or leave a large inheritance to a grandchild (while their child is still alive) a more in-depth conversation surrounding the GST tax needs to be addressed. As an advisor, it can be helpful if you understand the basics of the GST tax, the impact it can have on a client’s estate plan, and additional steps that may occur during the administration process at the client’s death.    

Several different returns involve the GST tax and we will touch on a few of them in this article. The appropriate form that needs to be filed with the Internal Revenue Service (IRS) will depend on the situation.

What Is Form 709?

This form would be used when a client decides to make a gift to a skip person during their lifetime. Form 709 is used to report transfers that are subject to federal gift and certain GST taxes. This also includes the allocation of lifetime GST exemption to property transferred during the transferor’s lifetime. The IRS has provided instructions for the transferor to complete the form.

What Is Form 706-GS(D-1)?

Form 706-GS(D-1) is used for trustees of a trust to report distributions from a trust to a beneficiary that are subject to the GST tax. For additional assistance, the IRS has published instructions for completing the form.

What Is Form 706-GS(D)?

Form 706-GS(D) is used for skipped persons to report tax due on distributions made from a trust to them, that is subject to the GST tax. Like the other forms from the IRS, some instructions walk through the completion of the form.

What Is Form 706-GS(T)?  

Form 706-GS(T) is used for trustees and any other entities or responsible parties to calculate taxes and report what is due from certain distributions and trust terminations subject to the generation-skipping tax. There are instructions for tax computation and separate sections for required information for the transferor and the trust.   

You can help affluent clients create a detailed list of documents and information required to determine the value of the money and property transferred to their trust or given outright as a gift or part of an inheritance. Understanding the complex calculations is critical.  

The amount of the GST tax exemption allocated to the transfer is divided by the value of the property involved in the transfer. The fraction is rounded to the nearest one-thousandth (.001) and looks like this:  

The next step is determining the inclusion ratio by subtracting the fraction from the number one. Depending on the ratio, the trust is either fully exempt, fully taxable, or partially taxable. 

Completing the Forms 

To fill out the applicable forms, individuals need to gather a significant amount of information. Here is a list of some of the information that may be needed: 

  • The legal name of the trust and its federal tax identification number 
  • Name and Social Security Number (SSN) or Employer Identification Number (EIN) of theindividual making the GST 
  • A list of all beneficiaries, including their names and relationships to the transferor 
  • The generation of each beneficiary in relation to the transferor (skip person or non-skip person) 
  • Name and address of the trustee(s) responsible for managing the trust 
  • A detailed list of all assets held within the trust, including values at the time of the GST 
  • Appraisals of assets to determine their fair market values 
  • Information about any other gifts or transfers made by the transferor during their lifetime that could be subject to the GST tax 
  • Indication of how the transferor’s GST tax exemption will be allocated among the trusts 
  • Allocations to skip persons, including any direct skips, indirect skips, or taxable terminations 
  • Details aboutthe transferor or any beneficiary who is deceased 
  • Copies of the trust agreement and any amendments 
  • Any legal documents relevant to the GST 
  • Specific dates of GSTs 

Filing Deadlines 

Generally, these forms must be filed by April 15 of the year following the calendar year when the gift, distribution, or termination occurred. Help your client organize and prepare their information. Maintaining clear records and staying informed about any updates to tax laws will streamline the process of completing the filing on time.   

Collaborative Opportunities 

Working with other professionals outside of your area of expertise can help ensure accuracy and compliance with the GST tax rules. When we work together, we can provide the best possible service to our clients. Give us a call to learn more about ways we can collaborate.

Generational Wealth through Adoption and Dynasty Trusts

Since a dynasty trust is mainly used to create a lasting financial legacy for multiple generations, it is structured to provide for the client’s descendants. This is a common strategy to ensure that wealth is preserved and passed down over many lifetimes and stays within the bloodline. However, if a beneficiary does not have any descendants, other family members may likely inherit. If the beneficiary would like someone else to inherit, they may consider adopting that individual so that they will be considered a descendant. 

The Rights of Adopted Children According to State Law

Under most state laws, adopted children typically have the same legal rights and privileges as biological children. Once the adoption process is complete, adopted children are treated as the biological offspring of their adoptive parents.

Adult Adoptions According to State Law

Adult adoptions are legally permitted in some jurisdictions, but the laws vary and can be very restrictive. In some places, adult adoptions may be allowed for reasons beyond familial relationships, such as inheritance or emotional bonds. 

If the state allows it, your client’s beneficiaries could consider adopting adults to ensure that a loved one receives a share of their inheritance. 

Legal Considerations 

Inconsistencies in trust language can often lead to probate and estate litigation. If a trust does not specifically address the adoption and intent, it can cause problems, as was the case in Morse v. SunTrust Bank, N.A.

In 1967, a multi-generational testamentary trust was created to provide separate subtrusts for each of the decedent’s 13 grandchildren, including any new grandchildren born before or after the grantor’s death. If a grandchild died without any descendants, their subtrust would be divided and added equally to the remaining subtrusts. The decedent did not address whether adult adoptees would be treated as descendants.

One of the decedent’s grandchildren, Molly, never had any children. In 2018, she adopted two adults, ages 34 and 36, admitting that the adoptions were for the purpose of receiving distributions from her subtrust on her death.

Other subtrust beneficiaries objected to Molly’s adopted adult beneficiaries, accusing her of fraud. A trial judge agreed, preventing Molly’s adopted adults from inheriting as descendants.

An appeals court reversed the trial judge, noting that the testamentary trust had failed to place any limits on an adult adoption. Also, Georgia’s adult adoption statute did not include any language that would prevent Molly’s adopted adults from becoming beneficiaries of her subtrust.

Adoptions and Trusts 

It is important for your client to address the potential for adoptions as part of their estate plan. They need to know how adopted individuals (adults or children) will be treated as beneficiaries according to your state law and ensure that their trust clearly expresses their wishes. A trust can contain a definition of a descendant and address the possibility that an adopted individual will become a beneficiary of the trust. Alternatively, provisions in the trust can exclude adopted individuals.

Advising Your Clients

Adoptions are not necessary to transfer your client’s own money and property to those they choose. But trust beneficiaries without children may be able to use adoption to steer trust funds to the person of their choice rather than having the money redistributed to other relatives. However, adoption can backfire if a relationship ends, leaving an outsider with a share of the family fortune or alienating family members. 

It is crucial to consult with other professionals if adoption and estate planning fall out of your scope of expertise. They help ensure that any adoption-related strategies align with state laws and regulations, which define rules for succession for adopted individuals, whether minors or adults. Trust documents should be carefully drafted to account for various scenarios and to provide clarity on how adoptions would affect the distribution of money and property within the trust.

Successful Dynasty Trusts in History: The Rockefeller Family

Dynasty trusts have played a crucial role in preserving wealth and fostering a lasting financial legacy for many affluent families throughout history. One excellent example is the Rockefeller family, whose strategic use of dynasty trusts has made them one of the most prosperous and enduring family dynasties in the world.

Who Started It?

The Rockefeller dynasty trust was established by John D. Rockefeller, the American business magnate and philanthropist who founded the Standard Oil Company in 1870. As the wealthiest individual of his time, Rockefeller developed values and traditions to keep his family together and preserve their wealth over 150 years. In 1934, he established the family’s first trust, which laid the foundation for the creation of the dynasty trust in 1952, both managed by Chase Bank, that would protect the interest of family descendants for generations.

Standard Oil would go on to control 90 percent of US refineries and pipelines, and Rockefeller became the wealthiest man in the world and one of the first billionaires, with a family fortune valued at over $600 billion in today’s dollars. Standard Oil now operates under ExxonMobil and Chevron corporations. 

What Does the Trust Hold?

The Rockefeller dynasty trust encompasses significant and diversified assets, including equities, real estate, energy, technology, private investments, and philanthropic foundations. A strategic approach to protecting resources in trusts has allowed the family to preserve wealth and adapt to economic upheaval and fluctuating markets.

Who Benefits from It?

For over 150 years, multiple generations of Rockefeller family members have benefited from the trusts that successfully passed down wealth to support their financial literacy and education. This in turn allowed them to continue the family’s charitable pursuits in education, healthcare, business, and more.

Other Accomplishments and Philanthropic Initiatives

Beyond the financial aspects, the Rockefeller dynasty trust drives numerous philanthropic initiatives. It utilizes financial resources to encourage a sense of stewardship and philanthropy to shape the family’s financial future and guide each generation to make responsible impacts on society. The Rockefeller Foundation was established in 1913, addressing global challenges such as public health, education, scientific research, and environmental conservation, and still plays a pivotal role in shaping cultural institutions today. 

The Rockefeller Trust Continues to Be a Success

The last surviving grandchild of the Rockefeller patriarch, David Rockefeller, died at age 101 in March 2017. His oldest son, David Rockefeller Jr., 76, continues to protect the family’s financial security and philanthropy. The Rockefeller net worth is currently valued at $8.4 billion, spread out over 170 heirs. Various trusts have helped fund projects ranging from the arts to international trade.

Tips for Clients Considering a Dynasty Trust

If your clients are considering a dynasty trust, you should collaborate with other professionals to help them get started. Since setting up and funding a trust is a complex process, it could take some time to create the right strategy that aligns with financial and family goals. Clients need to understand their options to protect their assets and their family’s future.

If your client chooses to include a dynasty trust in their financial and estate planning, you can explain how this flexible tool is designed to hold, control, and distribute property over many generations. Using a dynasty trust, your client can decide how their money is going to be transferred, to whom, and when. Ask them to think about what they want for their family’s future and help them clearly articulate their goals for the next generations.

Dynasty trusts are powerful tools for those who want to provide a lasting legacy and financial security for future generations. The Rockefeller dynasty is a great example of the enduring success of well-structured and meticulously managed trusts and estate planning strategies. If you have clients who want to make a lasting impact on their families and the world, we can help.

Preserving Your Client’s Legacy with a Dynasty Trust

What Is a Dynasty Trust and Which Clients Should Consider Them?

Advising your clients on the best ways to protect their family and wealth requires considerable financial and estate planning knowledge. Armed with this knowledge, you can help your clients explore all options available to protect their legacy. Depending on a client’s situation, a dynasty trust may be one of the options you present. 

Who Could Benefit from a Dynasty Trust?

An ideal client for a dynasty trust is typically someone with substantial wealth and a desire to create a lasting financial legacy for their family that spans multiple generations. These clients are often concerned about preserving their wealth from erosion due to taxes, potential creditors, lawsuits, or other financial risks while ensuring responsible management and distribution of their money and property. 

High-net-worth individuals may need complex estate planning strategies to achieve these goals. A successful estate plan is not just about transferring wealth to the next generation. It is about sharing their vision for their family’s financial future along with setting certain guideposts for the management and distribution of wealth to ensure responsible financial stewardship.

How a Dynasty Trust Works

Creating and funding a dynasty trust should be done by an experienced estate planning attorney along with other trusted advisors. In working together as a team, these professionals can guide the client in deciding which cash, real estate, investments, or other valuable property should be transferred to the trust. The client may be able to use their lifetime gift tax exemption to successfully transfer these items while minimizing tax consequences for themselves and their heirs in the future. Tax-efficient growth creates an even greater legacy for successive generations.

A dynasty trust is designed to be perpetual or of long duration. Unlike some other trusts that have a limited or fixed termination date, a dynasty trust will likely last for multiple generations and continue to accumulate and grow wealth over time.

A dynasty trust often involves appointing a professional trustee, such as a bank or trust company, to oversee the management and administration of the trust. They must follow specific terms and guidelines, ensuring responsible governance and distribution of resources according to your client’s wishes. These terms may include flexible distribution provisions to provide income to beneficiaries, an option for the trustee to make discretionary decisions based on specified criteria, or permitting the trustee to adjust distributions in response to changing family circumstances.

Why Would Your Client Want a Dynasty Trust?

By placing money and property in a well-structured dynasty trust, your client ensures that the wealth they have worked hard to accumulate remains protected within the family.

Life is unpredictable, and unforeseen circumstances such as lawsuits, creditors, or even divorces can pose threats to the financial stability of your client’s family. Since money and property are legally owned by the dynasty trust rather than any individual family member, they can be safeguarded from creditor claims and legal judgments in many cases. 

Estate taxes can significantly erode the wealth passed down to heirs. Dynasty trusts are structured to minimize the impact of estate taxes over multiple generations. Additionally, the appreciation in value of trust resources while the client is alive will occur outside your client’s taxable estate, allowing for potential growth free from estate tax implications. 

Customized provisions in a dynasty trust can govern how money and property in the trust are managed and distributed. This level of control is particularly beneficial when there are concerns about the financial acumen or spending habits of future generations. Your client can ensure that their wealth is managed responsibly while still providing for their heirs. 

If you have high-net-worth clients seeking to create a lasting financial legacy for their families, help them discover sophisticated planning tools like the dynasty trust. By leveraging the benefits of perpetual duration, tax-efficient growth, asset protection, and responsible governance, your clients can address the unique needs and goals of their families over multiple generations. If you are interested in learning more about dynasty trusts and how we can work together to serve your high-net-worth clients, call to schedule an appointment.

We Are Celebrating International Networking Month

We Can Do Great Things When We Work Together

February is known as International Networking Month. During this month, we can celebrate our professional relationships by building and strengthening our networks. When we work together, we can provide unique solutions for our clients, like our hypothetical couple John and Jane.

Meet John and Jane  

John and Jane are beginning a comprehensive estate planning journey and need your help. John is a 45-year-old software engineer with an annual income of $150,000, and Jane is a 42-year-old marketing manager who makes $120,000 per year. 

Together, they have joint ownership of their primary residence with a current value of $600,000 and a mortgage of $300,000. John has $500,000 invested in a 401(k), $200,000 in various stocks and mutual funds, $50,000 in savings, and about $20,000 in credit card debt. Jane has $300,000 in her 401(k), $150,000 in investment accounts, and $30,000 in savings, with no significant debt. 

John and Jane have a strong financial foundation, but they are aware of the importance of planning for the future of their growing family. They have two young children, Danny (age 11) and Jenny (age 8), and want to ensure their wellbeing in the event of unforeseen circumstances. 

Serve as Their Financial Advisor

John and Jane need professional advice to address retirement savings and investment goals. If their investments are optimized, their estate can grow. A financial advisor can help them develop a strategy to 

  • maximize their investment portfolios, ensuring their funds grow efficiently and can fund their long-term goals;
  • create a comprehensive retirement plan, ensuring they are saving enough so they can maintain their lifestyle once they retire; 
  • assess and mitigate potential risks, providing a financial safety net for major life events; and
  • help ensure their investments are funded into their trust, if a trust is part of their estate plan.

Meet With a Tax Professional

A tax advisor can ensure that John and Jane’s estate plan is tax-efficient, preserving more of their wealth for future generations by

  • ensuring John and Jane are aware of available exemptions, deductions, and credits that can minimize potential tax liabilities during their lifetime;
  • discussing tax consequences when gifting money and property to their children or other loved ones;
  • evaluating real estate, potentially reducing capital gains taxes for heirs upon the sale of inherited property; and
  • keeping John and Jane informed about tax law changes. 

Contact an Insurance Agent

A professional insurance agent can advise John and Jane on the right amount of insurance coverage to provide liquidity in an emergency. Integrating risk management strategies into their estate plan provides a safety net for their family by

  • ensuring life insurance death benefits are sufficient to cover outstanding debts, ongoing living expenses, and the future needs of the surviving spouse and children;
  • choosing term life, whole life, or universal life policies for different situations;
  • considering long-term care insurance so John and Jane can access quality healthcare in an emergency; and
  • reviewing policies and beneficiary designations as needs change.

Reach Out to a Spiritual Leader

John and Jane may also consider advice from their spiritual leader about the legacy they want to leave their children and future grandchildren. Discussing the important lessons that they want to impart to Danny and Jenny and their future children can allow John and Jane to 

  • reflect on the legacy they want to leave to their children, not just in terms of money or property but shared principles, traditions, and giving back to the community; and
  • consider their end-of-life wishes to ensure that their spiritual and cultural beliefs are respected, from their desired treatment and care to funeral or memorial arrangements.

Take Valuable Advice to an Estate Planning Attorney

Advisors’ contributions paint a complete picture for John’s and Jane’s estate planning attorney, whose job is to prepare a strategy that aligns with their goals and needs.

An estate planning attorney can guide John and Jane through hypothetical scenarios based on their current situation to determine what would happen if they could not make their own decisions due to incapacity or death. They will need to

  • name trusted decision-makers in their powers of attorney for financial and medical emergencies; 
  • decide and document their wishes regarding life-sustaining treatments, organ donation, and funeral arrangements in their healthcare directives;
  • choose a guardian and backup guardians to care for Danny and Jenny in the event of their incapacity or passing;
  • create a plan to distribute and protect their wealth with a will or trust;
  • identify beneficiaries;
  • discuss any specific bequests or charitable intentions; and
  • explore strategies to preserve money and property for their loved ones.

Share the Love Through Networking

A team of advisors can provide expertise in various ways, resulting in a comprehensive estate plan that is legally sound but also deeply rooted in John’s and Jane’s values and preferences. From developing trusts that protect their life savings to transferring property and personal belongings equitably to both children, John and Jane will have peace of mind that their children will not suffer unnecessary tax consequences, issues with creditors, or complications when the time comes. Let’s work together to help ensure that all of our clients will have a successful and comprehensive plan like John and Jane.