Madison Eubanks

Aug 28, 2024

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The 4 Hallmarks of Quality Estate Planning Documents Every Advisor Should Know

As a financial advisor, you don’t need to be an expert on estate planning documents. However, you do need enough foundational knowledge to understand what makes quality documents, to spot red flags, and ultimately to ensure your clients’ documents serve their long-term goals. 

Documents vary widely from client to client, with the complexity, density, and number of documents often increasing as wealth does. With so much nuance, how is an advisor to know what to look for in a client’s plan? 

Dana Foley, Founder and Partner at Accelerant Law, outlines the four hallmarks of quality estate planning documents that advisors should be on the lookout for with any client, regardless of wealth level. 

To hear these pillars from Dana herself, watch the on-demand one-hour webinar 2024 Best Practices for Foundational Estate Planning Documents: What Every Advisor Should Know. 

Four Hallmarks of Quality Estate Planning Documents

1. Tax planning provisions

The impending 2026 exemption sunset and surrounding legislative uncertainty means tax planning is more important than ever. Currently, the federal estate tax exemption is exceptionally high at $13.62 million per person. While this may only impact a small subset of high net worth and ultra high net worth clients now, many more people will be affected if and when the sunset takes place at the end of 2025. Barring an act of congress, the exemption is set to drop to $5 million per person indexed for inflation, which many advisors predict will be around $7 million. 

For advisors, this means planning for those clients who have taxable estates under the current exemption amount as well as the (likely many more) clients whose estates will become taxable in 2026. 

Additionally, quality estate planning documents should account for state, estate, and inheritance taxes. Twelve states and Washington, DC have state level estate taxes, and another six states have inheritance taxes. These are generally far lower than the federal amount, often in the $1 to $5 million dollar range, and over a quarter (26%) of US residents live in one of these states. 

What advisors should look for

There are two common ways to structure documents to incorporate tax planning into an estate plan that an advisor can look for when reviewing a client’s documents:

• Formula tax planning ensures a client’s remaining estate tax exemption is fully utilized to minimize estate taxes at the death of the surviving spouse.
• Disclaimer planning allows for a “wait and see” approach. This type of planning creates an opportunity for the surviving spouse, depending on the amount of assets at the time of the first spouse’s death and the exemption amounts at that time, to disclaim assets into a separate trust for tax planning. 

2. Adequate flexibility

Ideally, clients will review their documents every three to five years to make sure they are still accurate and in line with their wishes. However, few people are diligent about regular reviews and many people die with rigid, outdated documents. Why is this an issue? Trusts can sometimes last years after a person’s death but may not have provisions to accommodate changes the family goes through, like, for example, the birth of a grandchild who has special needs. 

What advisors should look for

High quality, flexible estate planning documents can account for unforeseen circumstances without court involvement. Ideally, trusts with flexibility allows for: 

• The ability for an independent fiduciary to amend the trust without beneficiary consent or court intervention;
• The ability to terminate small trusts if necessary;
• The ability to change situs, which could be necessary if the client dies in a state that isn’t tax-efficient and beneficiaries have moved away;
• Self-perpetuating fiduciary appointment provisions so that a court isn’t needed to appoint a successor in the event of a vacancy.

Often, this level of flexibility is included in documents for ultra high net worth clients but not in documents for clients at lower levels of wealth. For families with lower asset levels or in a building wealth stage,this flexibility is even more appropriate since their beneficiaries might not have the resources to go to court to have rigid documents changed. 

3. Creditor protection

In the context of estate planning, a “creditor” is often a divorcing spouse. Divorce rates have risen in recent years, and increase with the number of marriages: 

• 42% of first marriages end in divorce
• 60% of second marriages end in divorce
• 72% of third marriages end in divorce

While mandatory distribution used to make sense in estate planning documents, these heightened divorce rates mean many couples should rethink including them. 

For example, trusts created for children that contain mandatory distribution or withdrawal rights may not be fully protected from claims from a spouse. While the estate owner might have liked the idea of giving agency to their beneficiaries at the time of drafting, they often fail to consider the threat of a divorcing spouse. 

What advisors should look for

In many cases, the best course is to structure lifetime trusts with discretionary distributions. This allows the children to eventually become co-trustees, and to have the ability to remove and replace trustees when they reach appropriate ages. 

In other words, this trust structure lets you have your cake and eat it too—children can control assets as trustees, but trusts are still structured in a way to protect the assets from creditors like divorced spouses. 

4. Uniformity 

Though discrepancies remain, many states are coming together and adopting uniform trust codes. While some elements of a trust still need to be tailored based on the state, uniformity can help attorneys and advisors in several ways. 

For example, clients are moving around a lot more than they used to, and it can be tedious for advisors to have to learn multiple state requirements. 

What advisors should look for 

Uniform documents can look very similar from state to state. There are still particular state laws that need to be complied with in the documents (for example, Florida’s homestead exemption), but the hallmarks and structures of the documents can be largely the same. 

Additionally, many inconsistencies in state laws can be drafted around. So even if a client lives in a state that hasn’t gotten on board and modernized its estate codes, they can still take advantage of modern day trust provisions with uniform documents. 

Advisors can enjoy unlimited document creation through Vanilla Document Builder, making it possible to deliver quality estate planning documents to every client. Learn more with a personalized demo.