Most people think of estate planning as deciding who will get their property when they die. While the disposition of assets certainly is part of the process, proper planning-especially for business owners, executives and people with significant assets-also includes decisions about the types of property to own, the form of ownership, minimizing taxes, asset protection, business succession and deciding whether to leave property to beneficiaries outright or in a trust.
Everyone, regardless of age, health or financial position, needs the following basic estate planning documents:
A will: Names your executor to manage your financial affairs upon your death and distribute your property to the beneficiaries named in the will.
Advance directive for health care: Names a person-your agent-to make health care decisions for you if you are incapacitated, and indicates whether you want certain medical intervention, such as artificial hydration and nutrition.
General durable power of attorney: Names your agent to manage your finances if you are incapacitated.
Two other things to consider-depending on your situation-are revocable trusts and planning for children.
Revocable trusts: A will is a public document. After your death, any person can visit the probate court to read your will and obtain a list of your assets. Like a will, a revocable trust can direct the distribution of your assets after your death, but without the publicity or expense of probate. In order to take advantage of the privacy the trust can provide, however, you must transfer title of your assets from your individual name to your trust during your lifetime. For example, if you own stock (whether closely held or publicly traded) or stock options, the corporation's books should list your revocable trust, not you personally, as the owner of those assets. A revocable trust can also provide estate tax benefits upon your death, but it doesn't provide any tax benefits or asset protection during your life.
Planning for young children: Most young families start with a modest estate, so estate taxes (discussed below) often aren't an immediate concern. However, if you have minor children, proper planning is critical to provide for them if either or both parents die. In particular, you will need to name guardians for the children. This is often the most difficult decision people make during the planning process. Although your gut reaction may be to name your parents or siblings, you must consider carefully the ages of your guardians (will grandparents be young and healthy enough to assume the role of a parent?), as well as their values and parenting styles. You should structure a minor child's inheritance so that enough money is available to support and educate the child until he or she is an adult.
Leaving money outright to a child is almost always inadvisable, since the funds will be held in a court-supervised guardianship account, and distributed outright to the child when he or she reaches the age of 18. Alternatives to outright bequests include custodial accounts (which are distributed outright when the child turns 21) and trusts (which can pay out the funds to the child over time at certain ages, or which can last for the child's lifetime).
Protecting Your Assets
For business owners, people with high net worth and those in high-risk professions (such as surgeons), protecting your assets from creditors should also be considered. On the simple side, you can make sure that you take full advantage of the asset protection opportunities provided by federal and state law. For example, qualified retirement assets, such as SEPs (simplified employee pension plans), 401(k)s and IRAs are protected from your creditors as long as the assets remain in the plan and aren't distributed out to you. On the complex side, asset protection trusts, which only NH and a handful of other states allow, provide a great opportunity to protect property, so long as you create and fund the trust before you have any creditor problems. You can also use an asset protection trust as an alternative or supplement to a prenuptial agreement, as long as you create and fund the trust before the marriage.
Minimizing Your Taxes
Former Treasury Secretary William Simon once said that the United States should have a tax system that looks like someone designed it on purpose. Unfortunately, what we should have and what we do have are two different things. The tax code, and in particular the rules applying to taxing estates, has been in a constant state of flux and uncertainty for more than a decade.
Under current federal law, estate taxes don't become a planning consideration until you have $5 million of assets ($10 million for a married couple). However, the estate tax exemption is scheduled to decrease to $1 million per person in 2013 unless Congress changes the law before then.New Hampshireis the onlyNew Englandstate that doesn't have its own estate tax so if you own real estate in another state, you'll need to consider that state's estate tax exemption when planning.
Once estate taxes become a concern, you should consider transferring assets (by gifts) during your life to minimize taxes on your death. Gifting assets is tax efficient, since it removes from your taxable estate both the value of the gifted asset plus any appreciation in the value of the asset that occurs between the date of the gift and the date of your death. Planning for lifetime gifts involves determining both the dollar value to transfer and the type of asset to give away.
Although cash is fun to give and receive, other assets, such as closely held business interests, often provide much greater leverage against estate taxes. Gifts of non-cash assets are usually made to trusts for the benefit of children or other family members, rather than transferred outright to a beneficiary. Gifting to a trust gives control of that asset to the trustee rather than the beneficiary, which is important if you are gifting business assets. You also can structure the trust so that its assets are protected from the beneficiary's creditors-including the beneficiary's current or future spouse-and from future estate taxes. In other words, the trust can provide the beneficiary with built-in estate planning in the form of asset protection and tax minimization.
Since the value of assets that pass at death usually is much greater than the value of assets gifted during life, it's crucial to consider both ownership and control of the property after your death to ensure that property can't be diverted to an unintended beneficiary (such as your current spouse's future spouse), squandered by a financially irresponsible heir, or passed on to a beneficiary with special needs in a way that jeopardizes his or her eligibility for public assistance.
Business Succession Planning
The transfer of control from one generation to the next may be one of the most important and difficult challenges the owners of a family business face. Failing to plan for business succession during life can seriously damage, and possibly even destroy, the company. Fewer than half of all family-owned businesses survive to the second generation.
Business succession considerations include planning for: The transfer of day-to-day control over operations, the transfer of voting control, equalizing the inheritance of family members who aren't active in the business, and payment of estate taxes if non-business assets won't be sufficient to meet the tax liability.
Since business succession planning usually involves emotional as well as financial considerations, it is definitely not a do-it-yourself proposition. In fact, many families find it worthwhile to engage a family business-planning consultant to provide strategies and tools to assist with the succession planning process. (For more information, see story on page 36.)
Adding a charitable component to your estate plan can minimize income taxes and estate taxes, and formalize your philanthropic goals. In addition to outright charitable gifts, a variety of planned giving options can customize a charitable bequest to suit your needs for control, income and family participation in the process. Your estate plan may involve one or more of the following:
Charitable remainder trusts
Gifts from IRAs and other qualified retirement accounts.
Because of its complexity, estate planning can seem daunting. To make the process easier, start with the easiest aspects -such as wills, financial powers of attorney and health care directives-that are the foundation of any plan. Then move forward in stages to take into account your particular circumstances, such as beneficiaries with special needs, closely held business assets, and estate tax and other concerns. A thoughtful and deliberate approach to estate planning will result in a flexible plan that reflects your wishes and is able to adapt to the needs of future generations.
Amy K. Kanyuk, Esq. is an estate planning attorney with McDonald & Kanyuk, PLLC in Concord. Contact her at 603-228-2802 and firstname.lastname@example.org To learn more, visit www.mckan.com.