Introduction
Estate planning is important for everyone, but it is especially essential for high net worth individuals. A larger estate significantly increases the likelihood of heirs squabbling over who gets a piece of the pie, and individual estates worth more than $5.49 million will be subject to estate taxes that can erode the value that beneficiaries will receive. Estate planning becomes an intricate process that requires careful planning and consideration, much beyond a simple will. As you sit down with your estate planning professional, here are seven topics that need to be addressed:
- End-of-life financial management
- Advance healthcare preparations
- Business succession planning
- Selecting beneficiaries
- Avoiding probate
- Minimizing estate taxes
- Protecting the inheritance for your heirs
End-of-Life Financial Management
If you become incapacitated, perhaps due to an illness, aging, or an accident, you will need someone to handle your financial affairs. This individual will need the authority to manage your financial holdings, pay your bills, provide care for your dependents, and act as steward over your estate as long as you are unable to do so yourself. Typically, people choose a spouse or an adult child for the role, but it’s not uncommon to see a trusted financial or legal advisor fulfill the obligation. Whomever you choose, you can grant them the legal authority to act in your name through a durable power of attorney. The power of attorney can broadly authorize the steward to do anything on your behalf, or it can restrict their authority to certain assets or accounts.
Advance Healthcare Preparations
While it’s an uncomfortable subject, healthcare is an unavoidable part of end-of-life planning. Even if you are able to avoid hospice care, you may be subject to accidents or unexpected illnesses that necessitate life-or-death decisions in a hospital. To prepare for this, it’s best to draft a living will—also known as an advance healthcare directive—and provide a trusted family member with a healthcare power of attorney. The advance healthcare directive will set forth your preferences and expectations regarding healthcare and life-sustaining treatment, and the healthcare power of attorney will give someone the ability to make important medical decisions on your behalf should you become incapacitated (much like the durable power of attorney, though this one is limited to healthcare decisions). The holder will be subject to whatever instructions you draft in the living will.
Business Succession Planning
If you hold an interest in a business, you’ll need to counsel with an attorney who specializes in this practice to address how your interest will be transferred. The laws governing business succession vary from state to state, but there can be crippling taxes and legal challenges if you wish to pass your business interests to your heirs. As a side note, it may be wise for your business partner(s) to take out a life insurance policy on you, so that when you die, they can purchase your share of the company from your surviving heirs, allowing them to retain control of the business, and your family to profit from the sale.
Selecting Beneficiaries
Before you begin to divvy out shares of your estate, make a list of everyone you’d like to list as beneficiaries. The list will probably be predominantly family, but you may wish to include friends, business partners, and charitable organizations, too. As you’re doing this, note any heirs who may expect an inheritance but, for whatever reason, will not receive one. Once you’ve made your allocation decisions, have a frank conversation with the people on the latter list, as they will be the most likely to contest your will if they feel unrightfully excluded. If there are any beneficiaries who will be included but may receive less than they expect, make sure they know what they’re getting ahead of time, too. These can be uncomfortable conversations, but hopefully having the discussion ahead of time will preclude them from contesting your will.
Avoiding Probate
Probate can be an expensive and time-consuming process for high net worth estates, with the potential to erode the value of your estate and tie it up in probate court for years. With proper planning, however, you can position many of your assets to avoid probate. Any accounts with third-party beneficiaries, payable on death (POD), or transfer on death (TOD) designations will naturally pass to your beneficiaries outside of probate. Accounts and property held in joint tenancy will also bypass probate. Trusts can also be a valuable tool to transfer assets out of your name and thereby avoid probate. If you’d like to retain control of the assets in trust, you can establish a revocable trust that allows you to modify, amend, or dissolve the trust during your lifetime. As long as you retain at least a 5% reversionary interest, the investment income generated by the trust will be reported with your personal income taxes each year.
Minimizing Estate Taxes
Depending on the size of your estate, this may be your greatest concern. Individual estates worth more than $5.49 million and joint estates worth more than $11 million are subject to estate taxes, and the tax can be as high as 40%. Luckily, there are a few strategies that high net worth individuals can employ to minimize their exposure to this crippling tax.
One example is to maximize the annual gift tax exemption. This allows you to gift $14,000 per year to anyone—family, friends, organizations, trusts, etc.—in order to slowly move money out of your estate during your lifetime. If you’re married, your spouse can also gift $14,000 per year per person, doubling the total amount you can gift. Depending on your long-term plans, it may be wise to initiate a gifting strategy to take advantage of this long before your final estate is subject to the estate tax.
Establishing an irrevocable trust is another common strategy. Assets transferred to an irrevocable trust cannot be reclaimed by the grantor, and are therefore transferred out of the grantor’s estate. Any funds transferred to the trust will count towards the unified tax credit ($5.49 million for individuals or $11 million for joint estates), but it comes back to the principle of paying taxes on the seed rather than the harvest. It’s better to take a smaller tax hit when transferring the assets today, and let them grow inside the trust without increasing the final value of your estate down the road.
Protecting Your Heirs’ Inheritance
Sometimes, it’s not the best solution to simply gift assets to people. Perhaps you want to set limitations to control how a beneficiary uses their inheritance, such as stipulating that it can only be used for higher education. When considering inheritances for minor children, many parents want to provide income during childhood, but withhold full access to the principal assets until they reach adulthood. Both of these interests can be served by establishing a trust. The trustee will dutifully manage the assets for as long as you dictate, providing prudent investment management and dispersing income as necessary, until the beneficiary receives full access to the assets in the trust on the date or conditions of your choosing.
Another common concern arises when one or both spouses have children from another relationship. In this scenario, you probably want to leave an inheritance for your spouse and your children, but you may not wish to leave an inheritance for your spouse’s children from their previous relationship. Similarly, if your spouse remarries after your death, you may prefer your inheritance passes to your children rather than the new spouse or any children that come from the new relationship. A trust can solve this by providing income for a surviving spouse during their lifetime, but withholding access to the principal until the surviving spouse passes away, at which point your children would receive the full inheritance.
For long-term peace of mind, contact us to set up a consultation today. We look forward to helping with your will and other estate planning needs.
Call Arizona Estate Attorney Dave Weed at (480)467-4325 to discuss your case today.