Broker Check

Will Your Estate Plan Survive a Stress Test?

In this episode, Royal Standley focuses on stress testing financial and estate plans to ensure the clients have saved enough for the lifestyle they are accustomed to. Royal shares how he helps clients identify their needs and discover possible problems before they happen.

Episode 81 Transcript

Intro: Royal Standley of Oregon Pacific Financial Advisors offering securities through United Planners Financial Services, member FINRA, SIPC, guides clients with empathy in discovering and reaching their financial goals and creates financial plans for clients so they can live their lives by design. In these episodes, he relates his financial insights and discusses timely topics. Royal strives for excellence and has a passion for sharing his knowledge and supporting his community. Now onto the show.

Aric Johnson: Hey, Royal, how you been?

Royal Standley: I'm good. How are you doing, Aric?

Aric: I'm fantastic. I'm so excited to get into today's podcast, but you are in a highly regulated industry.

Royal: Yes, I am.

Aric: And because of that, sometimes we have a disclosure that needs to be read, so let's do it.

Royal: All right. Here's the disclosure for today. Discussions in this show are for educational purposes only. Information presented should not be considered specific investment advice or a recommendation to take any particular course of action. Always consult with a financial professional regarding your personal situation before making any financial decisions. The views and opinions expressed are based on current economic and market conditions and are subject to change. All investing involves risk, including the potential for loss of principle. Securities offered through United Planners Financial Services member FINRA, SIPC. Advisory service offered through Oregon Pacific Financial Advisors, Inc. Oregon Pacific Financial Advisors and United Planners are independent companies, and neither Oregon Pacific Financial Advisors nor United Planners offers tax or legal advice.

Aric: Okay, now that we've taken our medicine, can we get on with the show?

Royal: Let's go.

Aric: Hello and welcome to Life by Design with Royal Standley of Oregon Pacific Financial Advisors. Royal, what's going on?

Royal: Nothing much, just enjoying the, uh, sunny weather that we're having right now.

Aric: Love it.

Royal: Yep, absolutely.

Aric: We are together again. You have got some good education to bring to the audience and myself. I'm excited. You were talking about some stress testing and I, I need to know exactly what that means.

Royal: Well, much, much like, uh, when they, they send you to the hospital and they make you walk on a treadmill. Kind of same thing, just see what happens when a system is put at stress, what happens. So what we're gonna talk about today is stress testing your estate plan.

Aric: Okay. All right.

Royal: And do you know what that means?

Aric: Well, you've talked about estate plans before, so I'm assuming that you're gonna run some scenarios. Okay? So you've got this estate plan. Now what happens if and whether it's a market decline or if you know you have another grandchild and you wanna spoil the stunt out of them, or if you know any of these things, right?

Royal: You've got it. So you can take it from here and I'll just step back and listen to you.

Aric: So if you're my wife, stop spoiling the grandkids. Cause sorry, because I'm stressing me out. Royal, I can't take it anymore.


Aric: I'm kidding. Yeah. Alright, so I'm excited because I know there's a lot of different ways that you're, that you have to stress test something because there's life happens, right? You've talked about that a lot on this podcast. Um, so you tell me you're the -

Royal: Right.

Aric: Uh, can't say the word expert on here, can I?

Royal: No.

Aric: You are the pro. Is that good? We can get, we can get by with Pro?

Royal: I think so. I think so. The, the Securities and Exchange Commission thanks you,

Aric: Yeah, for altering it. Got it.

Royal: Yes, absolutely. Um, so what we do quite often here at Oregon Pacific Financial is we are stress testing financial plans.

Aric: Mm-hmm.

Royal: We're stress testing to make sure that, uh, someone has saved up enough to live the rest of the, their life in kind of the style they've become accustomed to aim to see if there's any potholes along the way. Now oftentimes, you know, we're talking about the estate plan, but in larger estates or where there's more complications, for instance kids from previous marriages, uh, split families, lots of business ownerships, there can be a lot of moving pieces in a plan like that. So it's often helpful as financial planners to sit down and really walk through, uh, and this is where it gets a little macabre, what happens if someone dies? uh, and what happens if someone, you know, dies at a certain time?

Aric: Yeah.

Royal: And that's really what we can do to really give people some insight because it's always fascinating to hear from a client, here’s what I want to have happen. And then you ask them, okay, so is that what your estate plan says? And they go, I don't know.

Aric: Mm-hmm. Yeah.

Royal: Or they think it does.

Aric: Mm-hmm.

Royal: Or based off of our conversations and building out a financial plan for them, we realize that the things they would like to have happen aren't going to happen the way they think they're going to happen. So that's why we wanna stress test an estate plan to really give people some insight to say, here's, here's what you think's gonna happen. Here's what we see happening, you know, if you pass away right now, and here are the things that we can do to bring this back over into compliance. You know, working with your estate planning attorney, because we're certainly not gonna prepare any documents. You know, that's not our expertise. Our expertise is really in running those scenarios and giving our clients the information that they can take back to their, their, uh, their attorneys to have that drafted and put into place.

Aric: Yeah.

Royal: So let's go ahead and just start with the basics here of, uh, the estate planning documents and kind of the importance of everything.

Aric: Mm-hmm.

Royal: So when we talk about this, when we talk about this all the time, because it's really, really important, we really want people to say what they want to have happen and then make sure that that happens for them.So,

Aric: Mm-hmm.

Royal: The number one way most of our clients deal with estate planning is honestly through a trust. Now there's the will as well, but for most people, most of our clients, a trust makes a lot of sense for them because number one, they get to avoid probate. Uh, for the most part.

Aric: Yes.

Royal: Uh, they get to have something that's really more controlled. It's not a public event distributing a trust, whereas going through probate with a will, that's a public event that's gonna be, uh, before the courts and is much more likely to be challenged. Because it, you do have this, this capacity there or this kind of built-in protection where you can challenge a will.

Aric: Mm-hmm.

Royal: Whereas with the trust, it's just, you don't have as much liability there. Um, there's also the power of attorney forms, which really say, who makes decisions for me if I'm not able to. And then also there's the advanced directive form, which is a way of saying, if I'm not able to speak, here's what I, here are my wishes for my healthcare.

Aric: Yeah.

Royal: You know, do I want tube feeding? Um, you know, do I want to be be, uh, on, uh, machine-assisted living for a long period of time, you know?

Aric: Mm-hmm.

Royal: Do everything to keep me alive or, or do nothing. So those are kind of the fundamental estate planning documents. We're really just gonna focus on the will and the trust today. And then the other estate planning document that just gets overlooked so often is the beneficiary form. Now when you fill out a beneficiary form, what you're actually doing is you're saying, hey, I want to do something other than what's in my trust or my will.

Aric: I was gonna ask -

Royal: you're saying -

Aric: I don't understand that. So a beneficiary form is different than like your beneficiaries that you're assigning on, on specific documents, correct?

Royal: Correct.

Aric: Oh.

Royal: So what happens is, is, if you do your trust and let's say, okay, I'm gonna give everything to my wife, and then everything that's left over goes to the kids.

Aric: Mm-hmm.

Royal: And then if your beneficiary form, let's say, on your IRA, uh, is set up differently. It could be that you have a former spouse on there. And we, we've seen that before.

Aric: Mmmmm.

Royal: Could be, you know, I, I have a sibling on there. Hey, I got mad at my kids, or I forgot a kid, or I forgot a grandkid.

Aric: Mm-hmm.

Royal: Um, and I just threw it on there. We see that quite often where someone will make the mistaken, uh, assumption here that my oldest daughter is going to be our executor, so I'll make her the beneficiary of my IRA, and then she can split it between the kids.

Aric: Yeah, it's a bad idea.

Royal: And then it really comes down to that's a really big headache for her.

Aric: Mm-hmm.

Royal: Because now she inherits all this money and now she has tax consequences of getting it down to other siblings.

Aric: Absolutely.

Royal: And zero responsibility to do so.

Aric: Mm-hmm.

Royal: Because there's really nothing written in there, because when you fill out a beneficiary form, that supersedes you will and your trust.

Aric: Yeah.

Royal: And now beneficiary forms can be added to other accounts. You know, payable on death accounts at banks are ones where you're adding on a, a beneficiary. Uh, life insurance is another great one that has a beneficiary attached to it. Now, sometimes you will name your trust as a beneficiary, and that's where we want to coordinate with your attorney, just to make sure that everything's flowing the correct way there.

Aric: Mm-hmm.

Royal: So that's really what we're gonna focus on here, is the will, the trust, and the beneficiary form. And one thing we, we, we do always bring up is if you have a trust, you also have a will in almost all cases.

Aric: Mm-hmm.

Royal: You have what's called a pour-over will. That pour-over will is just a a break-in-case-of-emergency that says we didn't put something in the trust, so let's probate it. Let's go and go to the courts and get it put into the trust. So the trustee can manage that asset and then distribute it according to the language of the trust.

Aric: Okay.

Royal: Okay?

Aric: So the pour_over will doesn't have to be specific, is that what you're saying? I mean, that's what I'm hearing. So, you know, in case you didn't get something into the trust, you have pour-over will that says, hey, we may have other assets that didn't make it into the trust. We want all those into the trust. Correct?

Royal: Correct.

Aric: Okay.

Royal: And, and I've also seen, um, you know, some, some trusts, or actually some wills set up and some trust set up where they just say, hey, we're not gonna put anything into the name of trust while the person's living. We're just going to let the poor over will do, move all those as assets over. And I think that's a really - silly way of doing it.

Aric: Mm-hmm.

Royal: Because then you still have to go through the entire probate process to get all the assets into the trust after someone passes away.

Aric: Oh, so it's the full probate process in that situation.

Royal: Correct. Correct. It's, it's still a probate process and it depends on the amount of assets that are outside of the trust that you have to probate in there. In a perfect world, when we're designing this, and working with the attorneys, for the most part, we're gonna try to avoid probate unless there's a really specific reason that the attorneys are telling us that we want to go through probate. Because it's a whole lot easier not to have the court system involved in your life.

Aric: Yeah.

Royal: Especially after you lose a loved one.

Aric: Mm-hmm.

Royal: So that's why we love the trust as a, as a vehicle for making those transitions over. So, let's, let's just kind of dive in here and say kind of how we do this to really get a good sense of what a stress test looks like for someone.

Aric: Okay.

Royal: So, the, the first part of all this is really doing all of the financial planning inputs into our estate planning software that we would do for a normal financial plan. Where that's gonna start with is, uh, building out a net worth for someone and identifying what the current registrations of all of those accounts are. And that's where we want to look at account statements to see how, how are accounts registered with the custodians? How are IRA beneficiary forms filled out? So we want to identify all of those so we have a really clear sense of how things are owned and how they'll pass on.

Aric: Mm-hmm.

Royal: And the beauty here is, is once we get everything updated into our financial planning software and estate planning software, then over the years as things come up and change, we can really open that up to a couple of quick updates to account values and add in anything new and then very quickly provide really accurate advice, um, and updated advice to our clients about what are the estate planning costs and taxes look like, and what are the things that might need to be changed?

So that's really the power of having estate planning, uh, stress test done is once you do it once, you can go back and repeat it every few years just to make sure that you're still on track, and especially if we have a major, uh, tax law change.

Aric: Mm-hmm.

Royal: Uh, that's another great reason why to re-go back or to go back and redo that stress test. And just to let everybody know we're gonna have another major estate planning, uh, change in three years.

Aric: That's right.

Royal: Because in 2026, all all of the estate planning changes that were made in the, uh, Tax and Jobs Cut Act or the, the Tax Cut and Jobs Act (TCJA) are going to lapse for individuals, and so we're gonna be back on the old system unless Congress does something. So we know it's gonna happen one way or the other. Um, I'm, I will guarantee you nothing's gonna change until our next election, just because we have a divided Congress and right, right now they're just trying to figure out if they're gonna keep paying the, uh, the bills they have.

Aric: Mm-hmm.

Royal: So with all that being said, we want to do this on a fairly regular basis because not necessarily, your situation might not have changed much, but the outlook both in the state that you're living in and also with the federal government might change.

Aric: Yeah, absolutely. And then I, I'm assuming if someone decides to make a move, right, that's gonna be a, a major issue as well. So they want to, a lot of people move to Florida, let's call it Florida. There's gonna be big differences between the state that they were living in and going down there. And I'm assuming you can either stress test it before they go, or you know, once they've made that decision, you can make that, uh, do another stress test then.

Royal: Yeah. And, and for, for a lot of folks having that conversation of, hey, let's stress test things

Aric: Mm-hmm.

Royal: As a resident of Oregon where, you know, the, the bulk of our clients are, uh, it really makes a compelling argument to move to another state.

Aric: Mm-hmm.

Royal: With a 10%, uh, basically, uh, estate tax starting at a million dollars exemption, it can get really pricey, depending on the size of your estate to, to die in the state of Oregon.

Aric: Got it.

Royal: Yeah. So, uh, if, if you ever want to have an incentive to move to another state without an estate tax, uh, a stress test is a great way of, uh, uh, of quantifying how much it will, uh, cost you to die here.

Aric: Yeah. Wow.

Royal: Yeah. So, you know, the main thing that we, we really want to do is, is we want to get good information and really see the documents that you're using, uh, beneficiary forms, for instance. We wanna see the trust, we wanna see the well, and we just wanna make sure that everything is flowing based off of our conversation with you. So, we'll, we'll have a conversation with the client of saying, what do you want to have happen? And then we'll, we'll start walking through the trust to see what happens there, and then we can start really dialing in to see where the gaps are.


Royal: Where are the things flowing that we're -- things aren't happening exactly the way you wanted it to. Things aren't flowing to the people you wanted it to.

Aric: Mm-hmm.

Royal: And then once we build that out, then we can start assessing those results and making recommendations on ways of making this more, more efficient. Now I think one of the most interesting conversations I've had recently was with a charitable consultant and he was talking about when you die, you can give your money to three different places. Number one is your friends and family. Number two is charity, and number three is taxes.

Aric: Yeah.

Royal: And you know, he goes, he goes through a great thing of, of walking through, okay, if, if you had, you know, that magic marker and you could say, how much do you want to go to friends and family? How much do you want to go to charity? How much do you want to go to taxes? And just write in those numbers. Guess what? Most people aren't really allocating a whole lot to that tax column.

Aric: Yeah, I was gonna say usually a pretty big zero, if possible.

Royal: Right. Right. Now the government has different ideas.

Aric: Mm-hmm.

Royal: The government has systems in place to take part of your wealth when you die and use that money for, for what they want to do. So, with that, what we try to do is once we know where those columns are, then we can have, start having conversations with folks of, okay, where do you want to move these dollars from? Because the beauty of having a charitably minded client is we can help them reduce how much taxes they owe. And remember, it's not just estate taxes that we're figuring into this. We're also figuring out how much will your, will your beneficiaries have to pay in taxes on your retirement accounts. And that number can often dwarf what the estate tax is. So, there's a lot of different planning ideas there to start moving things around while you're living. To really limit the amount that Uncle Sam uh, gets in, in the, uh, kind of final equation there. And so that's what we want to do with the stress test.

The other important thing is, is we're not just looking at today, we're not looking to see, okay, what happens if you die today? We can also go ahead and project out okay, what happens if you die, let's say at 85 or 90? You know, what is the projected value of your investments and your estate going to look like? You know, what's our estimate of where the, where the estate tax falls federally and at the state level? Um, what are the things that we need to reserve for to get you there? And what that allows us to do is make those recommendations to really set up your estate plan so that you're not paying a lot in tax, cause I think that's the number one thing people want to avoid is, yeah, they don't wanna work all their lives, pay into the system and then have Uncle Sam or Aunt Tina come in to collect on what's left over.

Aric: Mm-hmm.

Royal: And so, limiting that amount is super important to people. Um, and also making sure that those dollars get to the right people and, and happen in the easiest way possible. Going through a protracted probate fight or, or God forbid, dying without a will and having the state determine how your assets get split up.

Aric: Yeah.

Royal: Is not ideal for anybody, so no. We want to be there as a resource to really say, here's what, here's what you want to have happen. Here's what happens. Here's our recommendations to make this easier on your beneficiaries and reduce taxes. And that's really what our estate plan stress test does. Uh, it does take quite a bit of time though, and, and so that's, that's where we need to make sure that our clients understand that this will be an ongoing meeting process as we do this analysis and really get to know what they're trying to accomplish. We're gonna have to collect a lot of information to do this. And then come back with some recommendations to make sure it's gonna flow through really how ever they want it to flow.

Aric: Yeah. Yeah. I'm, I'm assuming that, I mean, your clients know what they're in for honestly, because you have very open discussions with them. Um, but for the layman, for someone who's not, uh, yet a client, what does that kind of look like as far as time-wise? Obviously you've already talked about you're, you're gathering a lot of resources, so there's some homework that the potential client would have to do as far as getting some stuff, but what can you help with in that scenario and then about what's the timeframe, Royal?

Royal: Yeah, so I'd probably say we're, we're probably looking at, uh, probably, probably about three meetings to do a full stress test on someone's estate plan.

Aric: Mm-hmm.

Royal: If, if, if we're just meeting them for the first time, you know, if we're, if we're doing it for someone that we already have a relationship, it might just be a two meeting process.

Aric: Mm-hmm.

Royal: Um, but u usually three meetings to really dial in there, get to know them, build the plan, and then come back with our recommendations and kind of that snapshot of here's, here's how this is going to work. Here's how you have it set up, here's what you want it to be, and then getting them in front of their attorneys or recommending an attorney if they don't have one, so that they can get those documents dialed in and then they can take that to the attorney and say, hey, this is what I want.

Aric: Yeah. Okay. So do you have a couple examples that you can give us of, of folks that you've worked with that kind of, maybe it was a, not a shock, but it was kind of a surprise either positive or negatively and you had to make adjustments or it was positive and they're like, hey, this is great, and we can do more than we ever thought we could.

Royal: Yeah, absolutely. So I, I have a, a client, uh, he, he came to me with just a will that he had just had done.

Aric: Mm-hmm.

Royal: And he owns multiple businesses. And he owns some of those businesses with various kids.

Aric: Wow.

Royal: And the will basically says, hey, when I die, split everything equally.

Aric: Yikes.

Royal: And so, as we looked at that and said, okay, well, well, is this really what you want? He's like, no, no, this, no, I've, I've got this over here. I've got that over there. This needs to go to this person. This needs to go to that person. And that's really where looking at that document and saying, here, here's what you want to have happen. Here's what the document reads. How do we fix this? That's the benefit that we can come in at. The other one really is people don't realize how much in taxes their kids are going to pay when they pass on retirement accounts.

Aric: Yeah.

Royal: So, there was a massive change about three years ago on how kids can inherit retirement plans.

Aric: Mm-hmm.

Royal: And it used to be that, mom and dad leaves the kids a million dollars in their IRA. Okay? They have to take a little bit out each year, but they can stretch it out over their lifetime. That was the old system. And if you had somebody pass away before 2020, you were locked into that system. But now when someone dies with an IRA and names it to one of their children, What happens is, is that child now has 10 years to get that money out. So that child, no matter kind of where they're at in life, has 10 years to realize the tax on that million dollars. You know, they can do it all upfront. They can do it all at the end. They can stretch it out in 10 equal payments or do it however they decide, but by that 10th year, they have to get every dollar out of it. So that's another challenge here where someone especially was looking at the old rule saying, oh, well this is easy. They can take it, and then they just have to pay tax on what they distribute each year. Hey, that's great for them. Now it's really, you've got a 10 way, a 10-year runway. You've gotta get that all out and pay all the tax on that, making it much more challenging for folks with just that little change. And that wasn't even a, a major change that was just built into one of the, uh, I believe the Secure Act.

So yeah, that's, that's where our value comes in is because as these things change, we can let people know and then update those things if it's a beneficiary or if it's a strategy thing. Because with that new, a new 10-year rule, there's a lot of strategy things that we can do to make things better. For instance, Roth conversions now look much more attractive for a lot of folks because if mom and dad start doing Roth conversions and shifting that money into a Roth, now the child doesn't have to pay taxes on that Roth.

Aric: Yeah.

Royal: And they can just let it sit in an account for 10 years, pull it out tax free, and it's great. So all of these things are, are factors that, that we bring in when we're doing that stress test. And it's always a moving target.

Aric: Yeah.

Royal: It would be nice if we just had, we had a system that never changed, but because we have two powers that go back and forth, it's always in flux and it can always be in flux. So.

Aric: Yeah.

Royal: That's the value of a stress test and that's the value of having one done. And when you can go back to, as these things change, or if you have a major life change, you know, losing a child, divorce, major medical where you have to start spending things down. You know, that's where we can, if we have that stress test done, we can say, here's where you should be spending your assets from to maximize what you can pass on to your kids. And that's the beauty of what we do, uh, with our clients when we do this type of planning.

Aric: Yeah. All right. Anything else for today or are we, we ready to wrap up and give some contact info?

Royal: You know, I, I, I see that look in your eyes. That says, uh, you, you, you've reached the end, so, uh, not we were, we were, we were talking off air about, uh, your, your late night. You, you stayed up until how late last night?

Aric: Oh, well, you know, 12 one, something like that.

Royal: You party animal.

Aric: Yeah. Well, there's -

Royal: But, but you, you were doing good in your community, weren't you?

Aric: This is true. This is very true. We were, we were, we were at a banquet and it was fantastic. Raised a lot of money, uh, for a, a good cause. And, and so it was nice. But yeah, I'm tired.

Royal: As we're talking, I just see, I just see your eyes just slowly blink.

Aric: And I feel bad, Royal. It was, it was great. It's a great podcast. I wasn't bored. I learned a lot,

Royal: but, but the great thing is, is now now I have it on, on tape,

Aric: Yeah.

Royal: And so I can blackmail you now.

Aric: Oh, perfect. Yeah. Well that,

Royal: No, I. I think this is a great time to wrap up. So, if, if you're interested in having a discussion about what this looks like for you and your family visit our website at, you can schedule a first appointment with me and we can walk through what that looks like, uh, what the costs would be based off of the size of your estate, and really puts you in a place where you can be a lot more comfortable with your estate plan, knowing that the things that you've worked so hard to accumulate go to the the people and the things that are most important to you.

Aric:Yeah. Yep. I think that that last line is the, is the kicker. Right? I don't want, I don't want my money going to the government. I, it is, I'm not a conspiracy theorist or anything else. I just want, if I've worked hard all my life and at the end of my life, I wanna bless my kids and my grandkids and hopefully my great grandkids, I just don't want it going anywhere else. So I, I love the fact that that's, it's more about control than anything else and making sure that what you wanna have happen happens. So I, I, I love it. Thank you Royal for this, this is a great, great podcast, even though I look tired. It was a great podcast.

Royal: I, I appreciate you staying awake.

Aric: You got it. That's what I'm here for, Royal, just to stay awake. All right. Well, thank you my friend. I appreciate it. And of course, our last thank you goes to your listening audience. Thank you so much for tuning in and listening to the Life by Design podcast with Royal Standley. If you have not subscribed to the podcast yet, please click the subscribe now button below. This way when Royal comes out with a new podcast, it'll show up directly on your listening device, and we humbly ask that you share this podcast, rate it, and leave a review as that actually does help others find the show. Again, thank you so much for listening today. For everyone at Oregon Pacific Financial Advisors, this is Aric Johnson reminding you to live your best day every day, and we'll see you next time.

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Please note that discussions in these shows are for educational purposes only. Information presented should not be considered specific investment advice or a recommendation to take any particular course of action. Always consult with a financial professional regarding your personal situation before making financial decisions. The views and opinions expressed are based on current economic and market conditions and are subject to change. All investing involves risk, including the potential for loss of principal. Securities offered through United Planners Financial Services (UP), Member FINRA/SIPC. Advisory Services offered through Oregon Pacific Financial Advisors, Inc. (OPFA). OPFA & UP are independent companies. Neither OPFA nor UP offer tax or legal advice.