Risk Management in Estate Planning

Life as we know it has changed. Now is the time to take stock of your estate plan to ensure that you and your family are protected as best as can be.

An essential aspect of every good estate plan is risk management. Proper risk management protects your assets and makes it easier for you to realize your estate planning goals and needs.

Risk management entails a comprehensive survey of all risks to your financial well-being that can be mitigated and minimized, including, but not limited to, the following:

Lack of Emergency Funds

We all know we need an emergency fund. The Covid 19 pandemic has reinforced this need for everyone. Without an adequate emergency fund in place, it is unlikely that you will be adequately prepared for unanticipated financial shocks if and when they happen.

General financial planning principals say that you should have at least 6 months of living expenses available to you at any time. But, many people struggle with this.

However, prioritizing proper budgeting and making regular contributions to an emergency fund is key. Having access to capital in the form of a Home Equity Line of Credit (HELOC) can also be very useful in emergency situations and uncertain times.

Potential Job Loss

Businesses are under a tremendous amount of stress right now. And many businesses will continue to struggle long after the pandemic has subsided. As a result, over 30 million Americans have been laid off since the beginning of the Covid-19 pandemic.

Again, cash reserves and emergency funds are the best ways to address the possibility that you too may be laid off or furloughed due to no fault of your own. But, having an updated resume prepared is also a good idea.

What’s more, regardless of who you work for and how long you have been on the job, it is important to network and to stay engaged with other potential employers. These relationships can provide a much-needed lifeline if and when you do need to seek new employment.

Insufficient Estate Planning

Do you have the right legal documents in place to preserve your assets and provide for your loved ones should you become incapacitated or pass away?

If you die intestate, meaning without a will and/or other estate planning documents in place, the state will dictate what happens to your assets. It also means that you will have lost the ability to identify parties who you would want to serve as your personal representative, and more importantly guardians for your minor children.

Having the following estate planning documents in place can ensure that your wishes are expressed and that your loved ones will be provided for should you become incapacitated or pass away:

  • Wills;
  • Living Trusts;
  • Health Care Proxies;
  • HIPAA Authorization; and
  • Durable Powers of Attorney

It is also important to note that if you are a parent of young adults, you should ensure that you have a Health Care Proxy and HIPAA authorization for each of your children who are over the age of 18.

Tax Law Changes

The federal estate tax exemption, which is currently $11 million per person, may come back down. Remember, the exemption was only $5.5 million per person not long ago and $3.5 million before that.

The next federal administration could revert the exemption back to its previous level. And, even without any changes made by the next administration, the current exemption is set to “sunset” in 2026 and revert to the $5.5 million level.

It is therefore important that if you have significant assets, you consider what you would do if the federal estate tax exemption does come down. Some of the traditional ways of mitigating estate tax include:

  • Gifting assets to trust;
  • Selling assets to freeze appreciation;
  • Using Spousal Lifetime Asset Trust (SLATS); and
  • Using life insurance owned by trusts to provide liquidity for taxes.

Lack of Life Insurance

If you haven’t purchased any life insurance, it’s important that you do so. If you currently have life insurance policies, it is important that you review/audit them to ensure that you have the appropriate type and amount of coverage.

Life insurance policies can be used for many different risk management purposes, including, but not limited to:

  • Income replacement;
  • Debt replacement;
  • Funding Specific Events (for example, paying off student loans, mortgages, business debt, etc.);
  • Burial expenses; and
  • Asset Diversification.

In addition, life insurance policies can provide some excellent tax advantages, most notably:

  • Death Benefits– death benefits are both income tax-free and capital gains tax-free and, if properly designed, can be free from estate tax and generation-skipping transfer tax as well.
  • Cash Value– cash value in a permanent life insurance policy grows tax-deferred and can be used to subsidize your standard of living during retirement.
  • Tax-free Withdrawals– in many cases, you can withdraw the cash value of your life insurance policy, (up to your basis in the contract) tax-free. Thereafter, you can borrow against the cash value, which can also be tax-free. Note, however, care must be taken when borrowing against the cash value of a life insurance policy. This is because a substantial tax liability can result if the policy lapses with loans outstanding.


The statistics are rather scary:

  • 1 in 3 American workers become disabled for 90 days or longer before the age of 65;
  • You are 3x more likely to become disabled than you are to die before the age of 65;
  • The average individual disability claim lasts longer than 30 months; and
  • Medical problems are a contributing factor to more than 62% of all personal bankruptcies filed in the United States.

These are all risks that you can avoid with disability insurance coverage. Yet, disability insurance is one of the most overlooked and underutilized types of insurance coverage in the country. In fact, most Americans do not have any disability coverage at all.

Disability insurance will replace a percentage of your income (typically, up to 60%), when you can’t work due to certain injuries or illnesses. While you can often obtain disability coverage through your employer, you can also purchase a disability policy on your own to supplement your employer’s policy and/or for more control.

But, just as with your life insurance policy, you should review your disability insurance policy regularly to ensure that you have not outgrown your coverage. Many policies provide annual opportunities to increase your coverage amounts, but these increases may not be enough to keep up with your current income.

Market Risks

Although the stock market has been surprisingly moving steadily in a positive direction, despite the upheaval the Covid-19 pandemic has wrought, there remains the ever-present risk of a downward correction. So, if you have significant wealth and assets, you may want to switch your investment strategy into “preserve and protect” mode until more certain times arrive.

What’s more, you should regularly review your investment strategy to ensure that it remains in line with your current estate planning goals and objectives. Depending on your age and risk tolerance, overly aggressive allocations can put your estate planning goals at risk and jeopardize your family’s future.

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