Estate planning continues to evolve in ways that enhance the importance of the CPA’s role relative to other advisors and to what it has been historically. While there has been incredible focus in the professional literature about maximizing basis, portability, and basis consistency, these may not be the real drivers to the CPA’s expanding role. A key part of this dynamic for many clients is the increased importance of financial forecasting to planning.

The Cleaver Family Isn’t Real

Today one can no longer attend a cocktail party without hearing chatter about portability. But is portability really as all-important as many articles make it seem? Most estate planning articles presume a 1950s, Leave It to Beaver nuclear family. But how common are they? High divorce rates, blended families, same-sex marriages, adult adoptions, posthumous conception, and other factors have all changed the nature of what constitutes a “family.” Consider—

  • in the United States, 40% of children are born to unmarried parents;
  • only about 20% of families consist of two parents and children;
  • only 50% of households are headed by a single person;
  • 90% of people marry, but 40% of the marriages in any given year are not first marriages.When an estate plan assumes that portability will assure the absence of an estate tax, practitioners should question that assumption and project the economic and tax consequences of the marriage not surviving. Have the estate planning documents defined “children” in a way that is consistent with the family reality and the client’s wishes? If irrevocable trusts are created, what will be the economic consequences to each spouse if the marriage ends? If nonreciprocal spousal lifetime access trusts are created and the couple divorces, does each spouse continue to be a beneficiary of the trust for their benefit? How will each spouse fare financially if divorce occurs? CPAs often know families better and longer than drafting attorneys and should not hesitate to comment on planning.Domicile Is Not Primarily about Taxes: When and Where to Retire
    Estate planning attorneys tend to view domicile as a determination of where estate planning documents should be created and what laws will apply to those documents (e.g., spousal right of election or state estate tax). But for a growing number of individuals—the 5 million Baby Boomers retiring every year—domicile should be addressed in the different and more important context of financial security. The domicile discussion must address the realities of where the client can survive financially. For example, if after a pre-retirement financial forecast, the client only has 65% confidence of not running out of assets by age 85, that assessment is too risky. What if the client relocates at retirement to a lower cost state? While that change might not currently be in the client’s plans, it might suffice to boost financial confidence to a satisfactory level. If the client waits until some future date to move to a different, lower-cost domicile, the financial damage may have already become irreversible. Using realistic forecasts may determine domicile, financial security, and even which lawyer will be most appropriate to create planning documents.

    Respect the Tails
    With individuals potentially living for two, three, or more decades past retirement age, planning to ensure adequate financial resources for that duration is vital. Too often, advisors plan for a client based on current wealth levels. This approach can be too restrictive to provide a plan that contemplates the breadth of potential results; financial modeling can provide a much more realistic assessment.

    Even with financial forecasts, however, there is often a bias to plan for likely financial outcomes. Advisors should nonetheless respect the “tails” of the financial forecasts, i.e., factor into the plan results that may be two or more standard deviations out on the bell curve. While these outcomes are not likely, they are possible, and considering these possibilities will better protect the client and lead to more robust planning. For example, the possible outcomes for a client with a $10 million net worth might range from $5 million to $50 million. For a married couple with $10 million, the likelihood of ever incurring a federal estate tax might be modest, but the rightmost tail of the curve (i.e., the highest-range outcomes) could result in a significant estate tax cost. So while the general recommendation for this client might be little or no planning, a more robust plan suggested by financial forecasting may be advantageous. For example, gifting modest amounts to nonreciprocal so-called spousal limited access trusts (SLATs) can shift growth in the assets outside of the estate. On the other hand, an outcome on the leftmost tail might result in a material reduction in the clients’ net worth. This suggests that asset transfers should be directed to structures that permit continued access to those assets. Helping clients understand the range of possible financial forecasts may motivate them to plan more sensibly and cautiously.

    Minimizing the Risks of Elder Financial Abuse
    Revocable trusts are a powerful tool for aging and chronically ill clients; however, case law and Uniform Trust Code (UTC) section 603 limit reporting or accountability to remainder beneficiaries while the grantor is alive. The law tends to view a revocable trust as a will substitute; therefore, if the client can change the trust, remainder beneficiaries are generally not viewed as having standing to demand an accounting, removing an important check and balance on trustee activities.

    A recent case illustrates the approach that courts have taken to revocable trusts. In Tseng v. Tseng [Case No. 120891165; A153639 (Oregon Court of Appeals, 2015)], the settlor created a revocable trust, naming children from a current and prior marriage as beneficiaries. Following the settlor’s death, the children from the prior marriage sued for information concerning distribution of trust assets from the revocable trust prior to death. The court held that while beneficiaries of a revocable trust have no rights during the settlor’s lifetime, no property interests, and no standing during the settlor’s lifetime to demand an accounting, such beneficiaries do have a statutory interest in the trust accrued before the settlor’s death, which they can enforce afterwards. Therefore, the court permitted them to receive the information they sought. The above right might provide protection for remainder beneficiaries, although waiting will arguably compromise that protection. The deferral of rights as in Tseng may, however, eliminate any protection a suit might afford an infirm grantor being subjected to elder financial abuse.

    Advisors should encourage clients using revocable trusts to have a CPA maintain books and records on an annual basis to monitor performance. An even better level of protection would be to incorporate into the revocable trust a requirement for an independent CPA to maintain records. An even further measure of protection would be to incorporate a trust protector into the trust who has fiduciary authority to act, including the right to demand an accounting.

    Planning Drives Decisions
    Financial planning and accounting is a driver for many key estate planning decisions, often supplanting legal concerns as the primary factor. CPAs should expand their roles in the estate planning process, taking into consideration the concerns listed above for the protection and well-being of their clients.

    Martin M. Shenkman, JD, CPA, AEP, PFS is an attorney at Shenkman Law in Fort Lee, N.J.