Introduction
Estate planning is essential for everyone, but it’s especially important for wealthy families. In addition to the standard features of an estate plan, wealthy families need a strategy to minimize estate taxes, transfer business interests, and include provisions to discourage heirs from squabbling over their inheritance.
Without proper planning, these challenges could result in crippling taxes, and a drawn-out probate process that could take years to ultimately distribute your estate. As you sit down with your estate planning attorney, here are seven topics to address:
- End-of-life financial management
- Advance healthcare preparations
- Business succession planning
- Selecting beneficiaries
- Avoiding probate
- Minimizing estate taxes
- Using a trust to prudently distribute your assets
End-of-life Financial Management
If illness, aging, or an accident render you incapacitated, you’ll need an authorized agent to manage your financial holdings, pay your bills, provide for your dependents, and act as steward over your estate. A spouse inherently possesses the capacity to do this, but if your spouse is also incapacitated or dies before you, someone will need special authority to handle your affairs.
Most of the time a sibling or an adult child is the default for this 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 with a durable power of attorney. The power of attorney can broadly authorize the agent handle any business on your behalf, or it can restrict their authority to specific assets or accounts.
Advance Healthcare Preparations
To prepare for end-of-life healthcare it’s helpful to draft a living will, otherwise known as an advance healthcare directive. If you become incapacitated and are unable to communicate important medical decisions, your doctors can consult your living will to determine acceptable treatment options.
For example, if you wish to be allowed a natural death, you can include a do-not-resuscitate order; or, if you want your doctors to do everything in their power to save and sustain your life, you can broadly authorize any treatments. Keep in mind your doctors will only reference this document if you are incapacitated. As long as you are cognizant, your doctors will always speak with you directly, and you are welcome to make decisions contrary to your living will.
It’s also smart to designate a healthcare proxy who can access your medical files and speak with doctors on your behalf. Most people provide this authorization to the same person who holds the power of attorney, but you can issue a separate power of attorney if you’d like to designate someone else as your healthcare proxy. Whoever you choose will be bound to the instructions in your living will.
Business Succession Planning
If you hold an interest in a business, you’ll need to counsel with an attorney who specializes in business law to address how to transfer your interest. 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
Start by making a list of everyone you’d like to gift assets to: your spouse, children, grandchildren, parents, siblings, nieces and nephews, and business partners. If you’d like to donate to any charities, be sure to include these organizations, too.
While you’re doing this, note any heirs who may expect an inheritance but, for whatever reason, will not receive anything from you. Once you’ve made your allocation decisions, have a frank conversation with the people in the latter category, as they will be most likely to contest your will if they feel 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. To discourage heirs from contesting your will, you can also include a no-contest clause that effectively disinherits anyone who contests the will.
Avoiding Probate
Probate can be an expensive and time-consuming process for wealthy families, with the potential to erode the value of your estate and tie it up in probate court for years. Fortunately, with proper planning you can position most (if not all) of your assets to avoid probate. For starters, the following assets can automatically avoid probate as long as they are organized correctly:
- Bank or brokerage accounts with a transfer-on-death (TOD) or payable-on-death (POD) beneficiary
- Retirement accounts (401k, IRA, etc.)
- Life insurance policies
- Property held in joint tenancy or tenancy by the entirety
- Trusts
Be sure to leave these assets out of your will. Not only do they inherently trump any directions in your will, but it’s almost sure to result in someone contesting your will if they are promised assets that contractually pass to another beneficiary.
The following assets are subject to probate, and should be addressed in your will:
- Individual bank accounts
- Brokerage accounts or life insurance policies that list the decedent or the estate as the beneficiary
- Real property titled in the decedent’s name or held as tenants-in-common (TIC)
- Personal property (cars, jewelry, furniture, collectibles, etc.)
- Business interests (a personal stake in a partnership, corporation, or LLC)
Minimizing Estate Taxes
Depending on the size of your estate, estate taxes might be your greatest concern. Individual estates worth more than $5.49 million and joint estates worth more than $11 million are subject to federal estate taxes. Some states impose an additional state tax on top of that. In the highest tax brackets, you could face up to 40% in estate taxes.
One strategy to avoid estate taxes is to maximize the annual gift tax exemption. The IRS lets you gift $14,000 per year in order to gradually move money out of your estate over time. If you’re married, your spouse can also gift $14,000 per year per person, doubling the total amount you can gift.
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 synonymous with the gift tax or estate tax exemption), but it comes back to the principle of paying taxes on the seed rather than the harvest. It’s usually better to take a smaller tax hit today, and let the assets grow inside the trust without increasing the final value of your estate down the road.
Using a Trust to Prudently Distribute Your Assets
It’s not always the best solution to give assets to people outright. When you’re dealing with a beneficiary who may squander their inheritance, or if you’d like to place stipulations on how the assets can be used by the beneficiary, establishing a trust is a great option.
The trustee you choose will prudently manage the assets, and will distribute principal and/or investment income to the beneficiaries according to the parameters in the trust agreement. You can choose to keep the trust open in perpetuity, or you can dictate at which point the trust should be liquidated and distributed to the beneficiaries.
If you have any minor children, a trust can be a great way to provide support for them without requiring a court-supervised conservatorship. Rather than transferring assets directly to them (which you can’t do, because minors can’t hold property), direct the trustee to distribute income to the children’s guardian until they turn 18, at which point they can dissolve the trust and transfer any remaining assets to them.
Call our Arizona Estate Planning team at (480)467-4325 to discuss your case today.