The Importance of Coordinating Professional Advisors

Whittier Trust

As a family’s asset base and balance sheet grow, so does the corresponding financial complexity. A number of wealth planning strategies can be employed to accomplish a family’s goals, from multi-generational wealth transfer, tax mitigation and liquidity planning for estate taxes to philanthropic and legacy planning.

To properly execute these strategies, having the right team in place is critical. A family will need legal counsel to advise upon and draft estate planning documents and a CPA, to ensure an optimized strategy from a taxation standpoint and that filings are done accurately. There is often an investment strategy that needs to be crafted and maintained by a portfolio manager. Sometimes an insurance or philanthropic expert may be needed. It is important to have someone coordinating with a family’s team of professionals, effectively serving as the quarterback. When developing and executing a complex strategy, having a trusted advisor at the center of the process can help increase the likelihood of a positive outcome. Here, we highlight a couple of these strategies and the necessary coordination.

A charitable remainder trust (CRT) is an irrevocable trust that provides a payout to a non-charitable beneficiary for a determined term of years (or the life of the grantor), after which the remainder goes to a charitable beneficiary. A philanthropic specialist can help the family choose the desired charitable organizations they would like to benefit and help them decide if a donor advised fund (DAF) is appropriate for their plan. It often makes sense for the donor to fund the trust using highly appreciated assets as the gift because it removes the asset (and its unrealized gain) from the donor’s estate, and they receive the extra benefit of a charitable income tax deduction in the year the trust is funded. The portfolio manager can work with the family to identify the most appropriate funding assets. Because the trust is irrevocable, the attorney drafting the trust, the CPA, the portfolio manager and the trusted advisor must be all on the same page as to the funding source, amount, income tax and deductions, as well as the trust’s annual payments to the beneficiaries. Without someone coordinating these efforts, there could be unintended — and irreversible — consequences.

Another frequently employed estate planning strategy is an irrevocable life insurance trust (ILIT). The trust typically will own a life insurance policy that is either purchased inside the trust or gifted by a grantor to the trust. At the death of the grantor, the policy pays a death benefit to a named beneficiary. Often, some of the proceeds are used to pay estate taxes that are typically due nine months from the date of death. The primary benefit is that the estate’s executor can utilize the life insurance proceeds to pay the estate taxes rather than having to sell assets that may not be as liquid in a short amount of time. 

While ILITs can be effective tools for funding estate taxes, they are complex and can contain pitfalls if the proper experts are not in place at the onset of the planning process. The grantor needs to work with an attorney who is very familiar with these vehicles — inexperienced legal counsel and drafting errors can cause serious issues down the road for both the grantors and the beneficiaries. A reputable trustee who is familiar with all the administrative and fiduciary responsibilities that come with ILITs, and who is comfortable with the potential risks and liabilities involved will also need to be selected. The trustee needs to work with an insurance expert to have projected premiums, cash values and death benefits reviewed. It is crucial to analyze existing policies every 2-3 years to determine that the financial health of the insurance company is in good order, whether it is prudent to keep the current policy or obtain a new one, and whether the current amount of premium paid and resulting cash value is sufficient. Without a thorough analysis by an insurance expert, the trustee can run the risk of the policy lapsing. Once again, it can be very beneficial to have a trusted advisor who can quarterback and coordinate the various aspects and experts involved.

The wealth management landscape is constantly evolving, and the tax laws that help inform a family’s decisions may also change. Without proper counsel and specific expertise, a family may be led down an unintended path and, sometimes, one that is not reversible. Often an entire team is needed to execute a strategy effectively. It is important to understand that no individual can make a complex wealth planning strategy work by themselves. Having a knowledgeable and trusted advisor at the center of your planning can help a family stay on task, organized and communicative with those critical team members.