Filbrandt Reports

How Can You Test-Drive Your Estate Plan? (Without Dying First)

Volume 17, Issue 8



Executive Summary:

Whether you have an old will, a current will, or no will at all, an “Estate Plan Audit” shows you how close or distant you are to achieving your estate transfer objectives.

The Top-Down approach to estate planning used by most practitioners often leads to unrealized expectations by clients.

It establishes minimum dollar target amounts, known as “Defined  Benefits,” for family to benchmark current estate plan results.

This report:

  • Outlines everything a good estate plan should include
  • Explains our “bottom-up” approach and how it’s different from others

Will Your Estate Plan Deliver the Results You Want?

Everyone has an estate plan. This is true whether you have worked diligently with an estate planning attorney and have a will and trust in place, or if you die without creating your own documents and the state where you reside determines the disposition of your assets. So in effect, everyone has a plan.

The question to ask yourself is whether or not your plan delivers the results you want?

No one likes unpleasant surprises, particularly when it comes to their money. But that’s exactly what happened when Bill and Mary, married professors at a Midwestern university, discovered that their estate transfer goals would come up short by almost $1 million. They had recently spent much time and money with an attorney to get updated wills and trusts in place. What was wrong? How did they find out that their estate plan would not achieve their goals before they died, when it would be too late to make any changes?

Bill and Mary’s situation was pretty straightforward – at least, that’s what they thought. Bill is a medical researcher, and Mary is a professor in the economics department. They are in their 50s and have two children – Brian, 17, and Julie, 19. Bill and Mary have three major assets: their home, their university retirement accounts, and group life insurance. These assets total about $2 million.

Bill and Mary’s goals are very clear. Should Bill die before Mary, he wants all of his assets to go to her. Similarly, Mary wants all of her assets to be transferred to Bill should she die first.

Bill and Mary agreed that when they are both deceased, they want their assets to be divided equally between Brian and Julie. Bill and Mary were confident that their estate wishes would be achieved because their recently drafted trust agreement was very clear, stating their intentions in language that really could not be misinterpreted – or could it?

Bill and Mary want to make sure both of the children are provided for. Their assumption was that in the chance that both Bill and Mary die this year, there would be enough assets to provide for Brian and Julie’s college educations, as well as a solid base of assets for the children’s future support.

The children are both still under 20 years old, and years of college costs are still in front of both. Additionally, Brian has a learning disability which could hamper his chances of ever getting into the workforce and earning a professional level salary.

Both Bill and Mary concluded that 50 percent of their total assets for Brian and for Julie would be sufficient and meaningful to accomplish their goals for the children. Bill and Mary had no reason to suspect that their estate transfer goals for their children would not be achieved with the newly drafted will and trust.

Estate planning was not a priority for Bill and Mary when they retained our firm earlier this year. After all, they had just spent money with their attorney, and the ink was barely dry on their new documents. However, they were very open to, as well as curious about, our offer of providing an Estate Plan Audit as a part of our Filbrandt Total Solution© for clients.

How Can You Test-Drive Your Estate Plan? (Without Dying First)

What Exactly is an Estate Plan Audit?

An audit, by definition, is an inspection – a review of current accounts by an independent third party. In the case of an estate plan audit, all documents are examined to determine if the clients’ wishes are achieved should death occur today. Many people are surprised to learn that their estate transfer goals are not even close to being achieved upon audit. Here’s why.

Most estate planning professionals use a planning approach we describe as “Top Down.” In the Top-Down planning approach, the client’s transfer goals are represented by percentages of assets. For example, in Bill and Mary’s plan, it was clearly stated in the trust that 50 percent of all assets in the trust at Bill and Mary’s deaths would go to Brian, and 50 percent to Julie. What was NOT discussed was the total dollar value of the assets that would actually be in the trust to divide between the two children.

The estate audit showed Bill and Mary that the assets available for distribution to their children were about 25 percent of the $2 million total, or about $500,000 for each child. Bill and Mary were surprised and concerned. They had incorrectly assumed that their goal of $1 million for each child would be accomplished with their plan, but the estate plan audit showed they would achieve only half of the intended goal.

So what happened to the other money? A combination of state estate taxes, income taxes and loss of group life insurance accounted for the $1 million deficiency. This was not at all acceptable, especially with the concern they had for the younger child.

How was the disparity resolved? Bill and Mary were advised to determine a minimum “threshold dollar amount” that they wanted to get to their children. In other words, instead of assuming that 50 percent of $2 million would result in each child receiving $1 million each, they needed to define the threshold in actual dollars; i.e., the goal is to have Brian and Julie receive $1 million each at their deaths. We describe this process as the “Defined Benefit” approach.

Bill and Mary went back to their attorney, this time giving him the precise dollar amount that was desired for each child. The attorney made the appropriate changes in all of the documents necessary to accomplish Bill and Mary’s goals. In addition, they made adjustments to their life insurance to make certain that the amount of coverage to achieve their goal was in place. They are now confident that their goal will be accomplished as they intended.

By Michael J. Filbrandt, CLU®, ChFC®                              

Chairman of the Board, Filbrandt & Company


Volume 17, Issue 8

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