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  • Writer's pictureZSS CPAs

Managing Risk in Estate Planning

Updated: Apr 25

Risk management should be a part of any long-term estate plan, especially when a plan is expected to cover several generations. Multigenerational clients tend to be more concerned with preserving wealth than taking risk on the upside of markets. They look at risk management from a portfolio construction standpoint — to reduce liability and have the right insurances and protections in place.

What's involved? A solid risk management plan does a 360-degree assessment of the risks to be minimized or mitigated. Risk management smooths the path to true wealth transfer.

To execute your plan with as few risk issues as possible, you need to consider the following issues:

  • Possible exposure to litigation and claims. Once a claim has been made, some asset protection strategies are subject to attacks and reversal by a judge or jury because such transfers could be deemed as fraudulent conveyances. Various strategies can help protect your beneficiaries from their inherited assets being pulled into a lawsuit. Trust planning keeps assets within the family in the event of a divorce or the death of a child.

  • Quantitative analysis. As defined by Investopedia, QA "is a technique that uses mathematical and statistical modeling, measurement, and research to understand behavior." This proposes to take some of the financial guesswork out of planning. Instead of thinking of and allocating your wealth as a single portfolio, you disaggregate it according to its intended uses to assist your family in planning. Many advisors will use the Monte Carlo simulation. This is a system that presents a wide range of outcomes in a particular situation to help pick the best strategy.

  • The potential for family argument. Is anyone being left out of a will who expected to be in it? Who may be aggrieved enough to start a lawsuit and challenge a will or trust? A combination of explanation in advance and well-worded will and trust documents can help avoid this. Attorneys and financial experts can point out potential "danger spots" in an estate plan.

You will also need to work with your advisors to set up a risk profile. This is basically how much risk you're willing to accept to meet your goals. In brief, how upset are you when the market goes down? Many advisors start with a questionnaire that will help them see how upset you'd be if you lost a certain percentage of your portfolio in a given year. When there's a loss, is your first inclination to start putting your money into safer alternatives?

Along with the risk you feel comfortable with, your advisor will work with you on the risk you are actually able to accept. For example, you may be able to take greater risk with an investment portfolio for the long term if you know you'll be able to count on a pension. Be sure to consult with your estate planner for further advice and ideas.

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