Considering Asset Protection Planning in Your Financial Plan

0_0_0_0_192_256_library_26353 Business planning and estate planning[i] are two major areas in which the question of asset protection is raised by investors and will often be incorporated in the financial plan and accompanying advice. The primary goal of asset protection planning is to protect one’s wealth from the reach of potential future creditors, whether your creditors or creditors of your heirs and beneficiaries. Such planning is typically engaged in as a part of the creation of one’s broader overall financial strategies, including the operation and succession of business, tax planning, retirement cash flows and ultimately leaving an estate.

Very generally, asset protection planning is the process of analyzing one’s financial situation to determine the best course of action to ensure that your various financial goals are served first and that all legitimate means for protecting your assets are taken. This ranges from transfer of assets to trusts to the purchase of insurance to the creation of limited liability entities to hold and manage assets. It is an area that can be very complex and which is extremely important to wealthier investors and business people, though almost anyone may take advantage of asset protection planning in the larger context of financial advising.

Why Do You Need to Consider Asset Protection?

The potential sources of liability, which in turn likely reduce that portion of your assets and resources expended in covering those liabilities, are numerous and may apply to almost anyone, regardless of a particular level of wealth. Consider, for example, the following partial list of areas of liability that may apply to clients: accidents involving vehicles, your home or business which result in personal injury and/or property damage; contract disputes and claims; divorce; environmental liability and many more.

Given the many potential sources of liability, it seems clear that being able to limit the amount of potential liability for any or all of these items should be helpful to people with regard to meeting their financial goals and objectives. In the best case, one should address these issues long before any liability actually arises, limiting the amounts that are within reach of creditors and maximizing amounts devoted to our goals. Where there is an existing lawsuit or formal claim, the potential for planning is greatly reduced but not eliminated.

What should you know about asset protection planning? Probably the most important thing to know is whether you could benefit from such planning and then work with an attorney well versed in the area and your financial advisor. That is how we will know the asset protection planning that takes place is both appropriate and coordinated with our overall financial goals and objectives.

What Doesn’t Work to Protect Your Assets?

First, there are some common misconceptions about asset protection and you should be aware of them so that your expectations are reasonable and able to be met. A lifetime revocable trust, as a practical matter, provides no protection from creditors since they can look through the trust to you. Although many types of creditor claims may be dischargeable in bankruptcy, thus protecting some assets from those creditors, a variety of other claims are not dischargeable, leaving your assets open to claims for taxes, for child support and alimony, for most criminal acts and intentional torts (civil wrongs) and the like. Note that many of these types of claims may overcome other asset protection strategies, such as spendthrift trusts, as well. However, certain types of assets generally provide some protection against creditors, including qualified retirement plans such as the IRA, 401(k) and 403(b), while even life insurance cash values or proceeds and annuities may be unreachable by creditors in many cases.

Second, doing nothing about asset protection may be far worse than making the attempt to incorporate some level of asset protection in your financial planning.  Acting before there is a need to engage in asset protection planning is a part of a sensible approach to financial strategies generally and also allows greater flexibility in planning.

Third, using only an asset protection trust in your plan may be insufficient. These trusts may not provide the levels of protection claimed by many of those offering them and great care should be exercised in working with these entities. A client should be encouraged not to place all of their assets in this basket. This is because domestic asset protection trusts – largely self-settled spendthrift trusts – although permitted in an increasing number of few states, offer protections which vary and which may not be fully recognized or enforced by other states. Foreign asset protection trusts have also come under high scrutiny and may not provide the expected protection, particularly where the requirements are not fully met.

A final, related consideration is that each client situation is different and the level and type of asset protection necessary will vary. This is where it is important to involve at least one expert besides your financial adviser in the advice process, usually one experienced in asset protection planning as well as debtor-creditor law. Such a team approach helps to keep the advice process focused on you and your needs.

How May You Protect Your Assets?

One basic asset protection planning technique is the acquisition of insurance against the risks associated with your personal or business activities. These activities may range from simply operating a business to owning real property to operating vehicles or machinery and so on. Although legitimate claims may never arise out of these activities, it is important to have insurance protection for the risk of an occurrence where liability may attach.  When a person owns reasonably adequate coverage (a topic not in scope for this article) then creditors and their attorneys are likely to settle their claims within the limits of the insurance policy, and the courts tend to follow this approach, though sometimes juries fail to act reasonably in entering their awards. Of course, insurance will not provide for all cases but does provide a reasonable starting point for many types of potential liability.

The limited liability company – or partnership – is currently in vogue as a method of asset protection planning, in addition to its other virtues. Typically, where a limited liability company (LLC) has multiple members, creditors of one of the members are limited to a charging order as their sole remedy with respect to the LLC. A charging order is basically the right of a creditor to reach the interest in the LLC held by the debtor (partner or member). This right is limited to the right to take distributions to which the debtor would otherwise be entitled and no more. It is a limited right, akin to an assignment, and may not be particularly attractive to creditors, hence the desirability of the LLC as an asset protection device. The underlying concept of the charging order is intended to protect the members of the LLC from being forced to accept a creditor of one of them as a partner or member of the LLC in lieu of the debtor partner or member. It is intended to protect the other members of the LLC in their operation of the entity.

The domestic asset protection trust is a popular vehicle offering asset protection. If you reside in a state that encourages and allows self-settled spendthrift trusts and your assets and even the trustee are all located within the state, then the likelihood of the trust being enforced in the state’s courts is reasonably high. This is limited protection however, and great care should be given to ensuring that your activities are confined to states recognizing and enforcing such trusts. It might help to consider using such a trust as only one part of an asset protection plan to ensure that not all assets are at risk. It might be useful to note that the validity and effect of these trusts has not been thoroughly litigated in the courts so that one does not really know the extent of the protections available.

Other types of asset protection planning that may prove useful include a broad variety of trusts in which you as the grantor retain no interest or only a limited interest that is outside your control. To the extent you have retained an interest in the trust, however, creditors generally can reach your right to distributions from the trust or other similar interests. These trusts generally are implemented as a part of a comprehensive estate plan or business plan that also includes asset protection planning. Note that these trusts should not be confused with asset protection trusts (foreign or domestic) or with the self-settled spendthrift trusts allowed in some states.


Asset protection planning is a legitimate concern for many of us. The techniques available range broadly from conservative and established approaches to “cutting edge” concepts. Some are more effective than others and an awareness of the status of particular methods, as well as the nature of potential claims, will be important for you and your advisor. Consider involving an attorney or other professional who specializes in asset protection planning where there are substantial assets and a potentially high exposure to liability.
[i] The discussion of asset protection within the scope of estate planning is addressed in a separate article.


George Chamberlin & Mentor RIA Consulting © 2003-2017

Addressing Family Conflicts in Estate Planning

0_0_0_0_495_327_library_55356 Although it is not always the case, many families experience disagreements or even outright conflict among the heirs when the eldest generation first plan their estates and then pass them on to their children and succeeding generations. Even in the most amicable family groups there may arise conflicts over particular assets, differing bequests, and, more often, control over the family assets or family members. Often, these conflicts do not manifest until after a parent’s death, and may come as a complete surprise to some family members. The outcomes of these conflicts generally are not satisfying to some or most of the family and can cost a great deal of time and money, in addition to the emotional damage of such conflicts.

In some cases, intra-family conflict may be addressed through arbitration, counseling and other tools and techniques which may allow the family to come to a positive resolution of their issues. This approach necessarily only occurs following the death of the parent or other family member whose estate plan is at issue and generally occurs where conflict was likely not anticipated or addressed in the planning, even if there was an awareness of some disagreement or conflict within the family group. A positive aspect of this approach to problem solving is its tendency to reduce the intensity of conflicts while avoiding the intervention of the courts and costly litigation.

Estate planning can allow a person to put into place a variety of tools and methods which may do much to reduce or eliminate potential conflicts among the heirs, at least insofar as the assets of the estate are handled. For example, a will can make it prohibitively expensive for a dissatisfied heir to contest the will by including a will contest provision, reducing or eliminating altogether a bequest to an heir who challenges the will. A will also may disinherit specific persons entirely, without reference to any contest, at the behest of the testator creating the will.[i] And not to be overlooked is a person’s use of their will to explain their intent and the reasons for the terms of the will and other parts of the estate plan. These types of provisions may go far to reduce conflict.

Quite apart from the will, trusts may be very useful in establishing an estate plan and by their terms may likewise reduce conflict within the family. A lifetime revocable trust allows one to make provision for how assets will be handled at the death of the person funding the trust while keeping open the ability of that person to change the terms of the trust as well as the assets during life. Similarly, a testamentary trust – one created by will – only takes effect at death and allows the estate plan to meet changing circumstances for the owner of the assets and the rest of the family. An irrevocable trust, however, cannot be changed once established and the terms of such trust must be thought through in advance.

How would these trusts reduce conflict? First, the trusts allow the owner of the property funding the trusts to specify when and how the beneficiaries of those trusts (generally family members) will be able to have access to the assets in the trust. Trust provisions may limit a beneficiary to receiving only income from the trust, preserving the underlying assets for future generations and protecting those assets from creditors of the beneficiaries. Other trust provisions may require a beneficiary to attain specified ages before receiving principal from a trust or to engage in favored behaviors (education, employment, marriage) while abstaining from disfavored behaviors (drug or alcohol abuse, gambling, unemployment). These requirements may not be appealing to some beneficiaries but when laid out in black and white make it more difficult to challenge or complain effectively.

Whether planning with a will or a trust or a combination of tools, the choice of the executor, trustee or other fiduciary is another powerful tool for one to use to prevent and address potential conflict among heirs. For example, an independent trustee who understands the goals and intentions of the person who is planning their estate will be (theoretically) able to act objectively and from outside the various family emotional entanglements. This can be contrasted with the selection of a family member who may not be accepted or trusted by other family members for whatever reason. Such a choice could easily lead to conflict with those not entrusted with handling the estate or trust who may feel their interests are not protected. What is important here is having in place a trusted person who is not going to be a lightning rod for any family conflict or unacceptable because of family history.

Finally, the value of a family meeting in which a person shares with the heirs and beneficiaries his or her intentions, goals and reasoning behind the estate plan cannot be underestimated. Setting expectations is huge for family members since the last thing any of them want is an unpleasant surprise or a feeling of being overlooked or ignored in the process. As we all know in today’s society, hurt feelings are right at the surface and can become an enormous problem for managing a person’s estate among other things. The family meeting also provides a means for educating the prospective heirs about what they will need to know and do to handle that inheritance wisely for themselves and their own heirs.

An important part of addressing potential conflict, once the possibility is understood, is consulting with the right professionals to help ensure that your estate plan is not derailed by conflict. Your estate planning attorney, financial adviser and other professionals may be helpful in planning for and avoiding such conflicts.

[i] As a general rule, a spouse will have statutory rights to their deceased spouse’s estate that may overcome a provision disinheriting a spouse. However, an agreement such as a pre-nuptial agreement may made sufficient provision separately from a will.

George Chamberlin & Mentor RIA Consulting © 2017


Working with Your Adviser: More than Just Investments

0_0_0_0_250_250_library_989Thinking about finances and reading what is current in the financial industry, most of us could be excused for thinking that advisers are pretty much all about recommending investments for you. Whether it is talking about the DOL fiduciary rule proposal, active versus passive investing, alternative investments, or even generating income with your portfolio, everything seems pretty much focused on what your money is going to be invested in pursuant to the advice you get.

Yes, there is some mention of holistic or goals based planning, usually on websites for wealth planners and the like, but that doesn’t appear to be what’s hot and definitely doesn’t have the attention of many investors and most advisers. In fact, many advisers say that their defining ability and characteristic is picking the right investments for their clients. Why, then, aren’t we all just rolling in it? And what is it that we should expect from our adviser and why?

There is no doubt about it, an investment which produces a good return is an important aspect of your finances. After all, most of us want to grow what we have so that we can do something with that money later. This brings us to our first point – what happens when you need or want to access some part of that wonderful investment? Some investments may produce terrific growth but may not make it easy to get at the money when you want it. Think of closely held company stock, which may be subject to restrictions on realizing the money. Or your qualified retirement plan with its ten percent early withdrawal penalty on top of the regular income taxes on distributions. Even that publicly traded stock you bought years ago and which has grown dramatically in value carries with it a heavy tax burden when you sell, due to your low cost basis.

What this tells you is that it is not just about a “good investment” but more than that – an investment that fits. Which is our second point, the benefit you can derive from your adviser helping you to understand what you own and how to make sure that the mix of assets allows you some flexibility to address needs that may arise at a bad time for some types of investments. As we have seen, investments made solely on the basis of how they might perform can leave you in a bind even when they are wildly successful. So a good investment recommendation should be based on knowledge of what assets you already have and what you might intend to do with them and when.

This approach requires your adviser to know much more than how to pick a successful investment. The adviser will need to know a great deal about you and your personal situation, including your goals, family, other assets and more. The adviser will need to understand the rules and laws that apply to you and to the investments you and your adviser may be considering, as well as social security, Medicare, tax impacts and more. Only an adviser with this comprehensive type of knowledge may provide you with the confidence that a recommended investment is likely to work for you.


George Chamberlin & Mentor RIA Consulting © 2017



Succession Planning Down on the Farm

0_0_0_0_496_327_library_57856Although the issues in connection with succession planning that face farmers and ranchers mirror for the most part those questions and problems encountered by other types of businesses, there are some specific concerns which resonate for farmers and ranchers. We will take a brief look at both so you will be better prepared to meet with your advisors and make the right decision for you and your family.

First, a short list of some of the questions you will need to ask yourself and which are addressed more fully below:

  • Who might be interested in acquiring or continuing the business?
  • What is the value of the business, how determined, and may it be fully realized?
  • When would the owner wish to transition out of the business (and to what extent)?
  • Where is the business located and how may that affect your options?
  • How important to you is the deferral, reduction or avoidance of taxes?

Looking first at the “who” question, family is normally the starting point, particularly where there is someone already involved and likely interested in continuing the business. The short answer here leads us to the next questions and makes the whole process simpler. However, when the farm or ranch owner is already aware that there is no next generation to pass the business to, it makes little sense to leave the disposition of the business to the owner’s heirs. Where the owner enters into planning for the transfer of the business, the owner retains control over the planning process and saves the heirs from the need to handle that transition themselves. This amounts to a win on both counts and may lead to a better result than a hurried sale of unwanted assets upon the owner’s death.

Outside the family, the “who” will likely involve another person in the farming or ranching business, whether a large or small business, a local or distant business or even a newcomer to the business who may either be an employee of another farm or ranch or simply someone starting a new career. There are several organizations to be found online that are focused on getting buyers and sellers of farms and ranches together as well as other industry groups and associations. However, it is important not to overlook the potential for a non-farm interest, such as a developer, to show interest in the farm or ranch real property. Your intent as to the property and business may keep you from choosing such a successor and should be a consideration. In this connection, you may consider imposing restrictions on transfer of the business entity[i], including realty, so as to limit use or development or the persons who may inherit the business.

The next issue – the “what” or valuation discussion – is perhaps the most important to the owner considering a sale of the farm or ranch business. Understanding the real value of the business is important to obtaining a quality sale as well as essential to funding the retirement and perhaps estate goals of the owner. The services of a professional appraiser are well worth the time and cost to an owner since the results will permit setting a reasonable and attainable price on the property as well as informing the owner’s expectations for their future finances based on the sale price.

The approach to financing the sale is an important aspect of how best to realize the valuation of the farm or ranch. A lump sum payment is a good way to terminate your interest in the property but may be more burdensome in terms of taxes on that sale while a series of installment payments may not only spread out the taxes but will provide a stream of retirement income which may include interest on those installments. Extending financing to a potential buyer keeps the seller involved – which may or may not be a good thing – and may also allow a broader selection of buyers.

Although important to a lesser extent, the “when” question often provides great flexibility to the owner, particularly when it is not easy to let go and the owner does not feel pressure to hurry. This is a point where the owner usually has the most control unless circumstances are such that the owner needs to exit quickly, as where there is a disability or other need for immediate liquidity. The more flexibility we have on timing, the easier it is to negotiate a favorable transition that fits our schedule and goals.

There may be a lot more to the “when” factor than you might think since you will want to consider not only retirement timing but also your health, your financial resources apart from the business, the nature or identity of the buyer and how that might mean potentially having some participation in the continuing business, and the goals of your immediate family such as your spouse and children, if any. All of these factors, and more, affect the decision as to when a transition will be appropriate for you.

The location – the “where” – of the farm or ranch business is also an important factor since not every such business is located near a number of similar businesses. This may reduce the opportunities for a sale of an ongoing business and increase the desirability of working with a non-farm purchaser. However, in most cases there will be other local farm and ranch businesses which will help facilitate the sale of the farm or ranch as an ongoing business. Furthermore, if a family member or other individual interested in the business is presently residing at some distance from the farm or ranch, that factor may affect their ability or interest in acquiring the business.

In planning for the succession of the business, we sure do not want to overlook the impact of taxes on the decisions we make. Of course, just “how” important those taxes are to us is a useful starting point in evaluating how we might want to proceed. The large lifetime exemptions for estate and gift taxes will mean that those taxes hold less importance for many of us, particularly where the total value of the farm or ranch business is less than $11 million or so, which is the amount a married couple can pass to future generations without federal estate or gift tax. Of course, the “where” question comes back in play at this point since state taxation of estates and gifts varies greatly and depending on where you live and operate your farm or ranch business may affect your approach.

Income taxes on the transfer of the farm or ranch are another burden entirely, also varying from state to state but consistent on the federal level. Installment sales permit spreading out that tax burden and may allow lower brackets and rates to save some money. Interestingly, gifts of business interests may also save on income tax relative to the interests gifted away. One development in the area of taxes and succession planning for farms and ranches involves the use of a charitable giving tool – the conservation easement. This approach can protect the land used for farming from future development or non-sustainable uses while at the same time providing the present owner with some control as well as tax breaks.

At this point in the discussion, you can see that whatever your goals for the farm or ranch you will want to involve not only your financial planner but also your accountant and estate planning attorney in this process to make sure you achieve your goals with the plan you put into place. The questions above should help start the conversation and may open up a variety of options for you to consider in making the most effective succession plan for your farm or ranch business.

[i] This would apply where the business was established as a limited liability company or corporation as opposed to a sole proprietorship and the entity was made subject to the desired restrictions.


George Chamberlin & Mentor RIA Consulting © 2017

Choosing Among Assets for Funding Specific Goals

0_0_0_0_250_250_library_1000There are times in most everyone’s financial planning where their current income is insufficient to cover all of their current goals. This requires a determination regarding which investment assets should be drawn down to fulfill the goal or whether it is preferable to borrow. Although the difficulty of making such a decision is obvious during retirement for clients without a large pension or other similar cash inflows, such a decision may well be troubling at times before retirement as well. Typically, the wealthier person has more than one alternative for funding additional goals and will need to make their decision in light of the potential tax liability, the impact of the decision on future spending options and even the end of life estate goal where there is one.

While You Are Still Working

In the years prior to retirement, it can be difficult to fund goals that exceed current income. The first item to consider tapping would be your rainy day or emergency fund with the second item being savings for a different future goal that you may be able to make up later. These are existing funds likely to be found in a taxable account such as a certificate of deposit, brokerage account, or even a traditional savings account.

Just about the last item to consider using for such goals is money in your qualified retirement savings account(s) since most withdrawals are subject to the ten percent early withdrawal penalty as well as regular income tax. That can reduce the funds quickly while at the same time putting a dent in your retirement nest egg.

Another option might be borrowing the money but that requires servicing the loan, including payments of principal and interest that may burden your future income and reduce the ability to save for retirement and other future goals. The burden may be somewhat less where one is able to borrow from a family member who may offer somewhat better terms than are available from traditional sources.

If the need to fund the desired goal is not immediate, there is sometimes an option for funding the goal with anticipated proceeds of the sale of property or perhaps an inheritance or proceeds of successful litigation. As a few folks have found out to their discomfort, reliance on winning a lottery is not usually a reasonable plan.

During Early Retirement

Once you have retired and before you reach the age (70 ½) when minimum distributions are finally required from your qualified retirement plans or the age (70) when you can begin taking the maximum Social Security benefit, your approach to choosing the accounts to fund your goals may be focused on what will happen at those ages. For example, if you plan to defer taking Social Security until age 70, that cash flow simply will not be available to fund goals prior to that time. However, that might be a time to take some penalty-free withdrawals from qualified retirement plan accounts not just to fund current goals but also to reduce the amount that you will be required to withdraw once you attain age 70 ½. Those with very large IRA or 401(k) accounts may be well advised to utilize this approach.

Another factor to consider will be additional cash flows available to you once retired. Some folks will have access to a pension plan that can offer recurring payments that will be important to funding the ongoing retirement goals. Others may resort to an immediate annuity or annuitize an existing annuity to provide a cash flow. The role of a deferred annuity will be impacted by the lead time and the chosen annuitization date/age, since it may not be cost effective to begin distributions during the early stages of retirement.

Where income tax is a concern, the focus may be on funding goals from taxable accounts, particularly those with a higher cost basis and so lower potential tax burden upon taking withdrawals. The flip side here is where there is low income an opportunity exists for converting IRA funds to Roth IRA, with the accompanying payment of income taxes on the funds converted. This can allow for greater flexibility later in retirement when income may be higher on including required minimum distributions and Social Security benefits.

Later in retirement, once Social Security is coming in and required minimum distributions as well, most of us will focus on the established cash flows from these and any other sources for funding most if not all of our goals. If we have sufficient assets saved for retirement, we can be confident of funding our needs in most situations and will often have the luxury of engaging in estate planning for future generations, including children and grandchildren, as well as charitable and other goals.

As you can see in this discussion, there may be a number of considerations to address when funding goals that exceed current cash inflow. It can make a real difference to you and your future if you make the right choices in funding those goals. Your adviser should be able to help you understand your choices and help you implement them as well.


George Chamberlin & Mentor RIA Consulting © 2015-2017

Charitable Gifting as a Retirement Planning Strategy

One of the main purposes of financial planning, at least for most of us, is to attempt to provide for our eventual retirement in a meaningful way. Central to this retirement planning is the notion of providing for ongoing income during retirement to ensure that spending goals are met. There are numerous approaches to obtaining the desired income and financial advisers, insurance agents, brokers and others all have a plan on how you can attain that goal with their help. Today we will look at some offerings more often thought of in connection with estate planning but which provide a different way to establish recurring income during retirement. dreamstime_m_19200253

Among the recurring sources of retirement income you may be familiar with are those coming from the government – Social Security, some former employers – pensions, insurance companies – annuities, our qualified retirement plans – required minimum distributions and the like. Another source of recurring retirement income, not the first we may think of, is charitable organizations. There are several well-established and effective methods to combine a gift to charity with a flow of income back to the donor

A common estate planning technique is the charitable remainder annuity trust (CRAT) which is funded with a gift from the donor client. However, the charity does not immediately benefit since the trust pays an annuity to the client, to the client and spouse, or to some other designated person for the term of the trust. The trust term may be for a term of years or for the life or lives of the income beneficiaries. In retirement planning, you can see the benefit of having a dependable annuity for life. At the end of the trust term, most often the donor’s death, the charity receives the remainder of the trust assets.

It is important to understand that this type of annuity likely will not be as favorable in its terms as a commercial annuity purchased from an insurance company. This is because the rules governing the trusts require that the charity receive some benefit. However, the donor receives not only the annuity but an immediate income tax deduction for the present value of the gift to the charity. In addition, the charitable gift benefits charitable goals of the donor and will not be taxable in the donor’s estate at death.

A variation of the CRAT is the charitable remainder unitrust (CRUT) which differs from the CRAT primarily in the determination of the payout to the donor. The CRUT payouts are based on a percentage of the value of the assets in the trust each year instead of on a fixed annual dollar amount. Thus we lose some certainty in our planning for retirement spending that the annuity with its fixed payment provides.

Another technique available to the donor seeking income is the charitable gift annuity. As its name implies this gift is made to the charity in return for which the charity promises to pay an annuity for the life of the donor (or donor and spouse). Again, this payout is less favorable than that offered by commercial annuities since the charity must receive some benefit, the gift.

All of these techniques result in recurring payments, usually to the donor, and a portion of those payments will be taxable as income when received.  The flow of income provided during retirement is often preferred by clients used to budgeting based on their pre-retirement income flows. This fits in well with the plans of many clients and may work alongside with pensions, annuities, and RMD distributions from qualified retirement plan accounts to fund the anticipated spending needs.

It is important to understand that using a charitable gift approach to providing a retirement income flow requires a client who either has no other heirs (children, grandchildren, nieces and nephews) or has already made provision for them through other means. The charitable gift means that nothing will remain for those potential heirs once the client donor passes away.

Further, it is necessary for the client to wish to benefit one or more charities through gifting as the end game for these transfers, after the annuity payments are made, is the payment to charities of the remaining funds. Careful selection of the desired charities, together with the potential in some cases to name alternative charitable takers, will help make this technique a success for the client as well as the charity, though not so much, perhaps, for the taxing authorities.


George Chamberlin & Mentor RIA Consulting © 2017

Does Your Insurance and Estate Planning Work with Your Financial Plan?

A common problem area for many folks lies in the not uncommon disconnect existingsample-rc-plan between the insurance and estate planning they have in place and a separately created and maintained financial plan. In many cases, different professionals – attorneys, accountants, financial planners and advisers, insurance agents – have worked up a plan or offering in their area of expertise for the client at a different time and without cooperation with other professionals working for the same client. A disconnect between the efforts of these professionals may arise due to a lack of understanding by the client of what their various plans and products do and/or may result from a lack of communication among and between the client and the professionals involved in the different types of plans.

Why would you care about this potential issue? When a client has expectations and planning in place for their lifetime and also on and after death, they probably would not appreciate the impact of a failure of that planning due to conflicts and problems between their various plans and with the realities of their personal financial situation. Such problems always cost the client, and the client’s family, money, time and likely emotional damage, and in the worst case may cause their plans to fail them or, more often, their loved ones, entirely.


Life Insurance is a tool that is often sold to address a variety of possibilities revolving around the death of a client or spouse. The insurance may be a part of an estate plan or may just be something a client wants or believes they need to have in place. Where might a disconnect between one or more insurance policies and a client’s financial plan arise?

  • Insufficient coverage in the event of a premature death of one of a couple would leave the survivor without adequate funds to maintain lifestyle and goals the couple desires under their financial plan.
  • A client owns coverage previously purchased but not currently needed for any reason. For example, insurance purchased early in marriage to cover the cost of raising minor children in the event of an early death may not be useful when the children are grown and have left home. Such insurance would not be funded or a necessary part of the financial plan.
  • Where loans are outstanding against an insurance policy and the proceeds have been expended, the client would face interest costs on top of premiums due and the death benefit would be reduced while the loan was outstanding. These costs and potential benefit reduction could negatively impact the financial and estate plans if the loans and impact of smaller death benefit were not addressed therein.
  • Existing insurance coverage intended to benefit heirs may have been insufficiently funded in the past and will now or in the future require the payment of significant additional premium to keep the policy in force as the insured ages. Longevity might result in premium costs greater than the anticipated death benefit or beyond the resources of the owner(s). A lapse of a policy means no death benefit for the intended beneficiaries.
  • Group life insurance obtained through employment may have been terminated when the client left that employment – was that insurance replaced with similar insurance with regard to death benefit and cost? That insurance should have been considered in any comprehensive financial or estate plan created before the job change and if no longer available or changed then the plans should be adjusted to reflect the changes.
  • An estate plan might incorporate life insurance as a means of providing liquidity or a source of funds for payment of taxes at the death of an insured. Such insurance should be sufficient to cover the anticipated need and should be within the client’s budget as well. The financial plan must be considered before new insurance is acquired for the estate plan.

Other insurance products are often implicated in a client’s financial plan and will need to fit in with the client’s goals to ensure their effectiveness. For example, disability insurance is an essential part of many financial plans so that the unlikely event of a serious disability will not completely derail the financial plan and client’s ability to attain desired goals. Similarly, the use of long term care coverage may be hugely helpful in some cases but also a drain on resources the client might prefer to use elsewhere. The client and financial planner need to determine how to work with existing insurance or the need for new or added insurance depending on the situation.

Bottom line here: understand the need for insurance as well as its impact on the financial plan and other goals, weigh the options, and make an informed decision. Otherwise a client may find themselves without coverage they need or saddled with coverage they don’t or cannot afford.

Estate Plan

An estate plan often involves a complex arrangement of tools and techniques intended to help the client reach goals upon death, including an orderly transition of assets and the smooth handling of the obligations of the client’s estate. Focused primarily on a client’s future death, such a plan often runs the risk of ignoring lifetime issues and the changes that will occur in most families and situations before the client’s death. Some of the issues may be addressed by pursuing a regular review and update of the estate plan to remain current with changes such as marriage, divorce, addition or death of potential beneficiaries and/or trustees as well as changes in the law. However, sometimes the estate plan fails to tie in with the client’s actual situation, a disconnect that may result in a variety of problems.

  • An estate plan may be based on assumptions regarding ownership and interests in assets that do not match the reality of the client’s situation. For example, the effectiveness of a traditional A&B trust arrangement will depend on sufficient assets being titled in the name of each of a client and spouse, which may not have been accomplished. Although the portability of the lifetime exemption reduces dependence on this approach, much flexibility may be lost if attention is not paid to the titling of assets. In other cases, the client may fail to fund an irrevocable trust or other instrument which may render that part of the plan useless when death occurs before the failure is addressed.
  • The assumptions about growth and investment allocation used in an estate plan often will bear little relation to the assumptions used in a client’s financial plan. Without a consistent approach – which may only be obtained through full disclosure and cooperation of all persons involved – the plans will diverge quickly and either one or both will not be accurate. This is critical in both the financial and estate plans as the costs, including taxes, of an estate as well as the money presumed available for retirement goals in a financial plan are driven by these growth and investment assumptions.
  • An estate plan, like a financial plan, usually considers the client’s current and projected income as a factor in the suggested course of action. Some plans may call for the transfer of assets to an irrevocable trust or other vehicle well before retirement or death in order to attain perceived benefits, primarily in tax savings. However, a significant change in a client’s situation, such as loss of an income stream or substantial asset, may result in a failed financial plan with the conveyed assets, and the client’s remaining life goals, out of reach.
  • An estate plan often will provide for the use of assorted techniques and tools that are available to clients, with the intention of providing flexibility going forward. Care must be taken, however, to ensure that a client and other family members understand when to use or not to use them and why. A financial plan where a surviving spouse is dependent on assets received from the first to die spouse, for example, will be in trouble if that survivor disclaims some portion of the inheritance intended to secure the survivor’s future. This may happen, for example, where other beneficiaries encourage the use of the disclaimer to benefit themselves and is not unheard of in estate cases.

What you can take away from these examples is the need to examine your entire spectrum of financial and estate planning, including insurance policies, trusts, wills, financial plans and more to make sure you are aware of what you have in place AND how it works – or doesn’t work – together. A periodic review, certainly at least annually or more often as needed, will be helpful in ensuring that things are working as intended and respecting your personal situation as it exists at the time of each review.

George Chamberlin & Mentor RIA Consulting © 2016-2017