Last month, commenting on a Kiplinger article recommending that retirees have three investment “buckets” (one for short-term needs, the second for medium-term needs, the third for long-term needs), with assets in the third bucket invested most aggressively in the stock market, we noted in our blog that, when it comes to estate planning, “bucketing” involves thinking of heirs’ needs at different stages in their lives…This week, a piece in Financial Advisor magazine prompts us to look at a different aspect of “bucketing” as it applies to estate planning…
Traditional retirement income strategies may no long be enough in today’s environment, Russ Alan Prince posits. Solving for “sequence risk” by heavily filling conservative “buckets” of assets in the early years of clients’ retirement, with the goal of protecting them from market drops, does not work given today’s longer life expectancies. Furthermore, bucket systems tend to be very labor-intensive for financial advisors, who must make decisions about timing the filling of the income bucket. The Dunham & Associates approach divides assets into four portfolios:
- Distribution portfolio – where the check comes from
- Flex portfolio – for fun and emergencies
- Healthcare portfolio
- Legacy portfolio
Historically, the authors point out, the primary objective has been less volatility, with “getting a little growth” a secondary objective. “Our view”, Russ Alan Prince states, “is that this may be backward”.
At our Indiana estate planning law firm, “bucketing” of resources involves thinking, not only of our clients’ own needs at different stages of their lives, but of heirs’ needs, also subject to change as the future unfolds. For that very reason, even if there is no family business, we try to bring together family members of different generations to share values and wealth transfer plans. “Bucketing”, a tool for organizing information, opinions, and resources is, at least when it comes to estate planning, “multi-generational by definition”.
In order to incorporate flexibility in an estate plan, trustees must be empowered to adapt to unforeseen circumstances and the changing needs of beneficiaries. This might mean:
- appointing a “trust protector” to provide oversight
- giving beneficiaries the authority to direct assets to individuals or charities
As part of the estate planning process, it is important to envision what distributions will be made to beneficiaries (initially and, possibly, on an ongoing basis), as well as whether those beneficiaries will be given power to direct assets to charities of their choice.
At Geyer Law, we think of “bucketing” as a way to give form and function to the process of meeting one’s own goals while considering heirs’ needs at different future stages of their lives.
– by Rebecca W. Geyer
