These all-too-common misconceptions can steer your estate plans in the wrong direction right from the start. Here’s how to overcome them and tips to build the right plan for your family.
Estate planning should be a fairly straightforward exercise in taking stock of what has been accumulated and making sensible determinations as to how best to leave a lifetime’s legacy in good hands.
We all know the reality is often different, and it is easy to understand why misconceptions, often based on emotions, arise and get in the way. These emotions, whether they be the pressure of time or the perceived need to be fair and equitable, are what cloud rational decision-making just when it is most needed.
In my practice, I have found that reactive decisions seldom work as well as decisions based on strategies set in place over time. Below I address these and some of the other most common misconceptions that get in the way when setting up an estate plan or making alterations when life changes occur.
While important, taxes should never be the primary focus of a well-thought-out estate plan. Tax-driven estate planning is even less important in 2020 since the federal estate tax exemption is in excess of $11.5 million, and fewer than 3% of taxpayers are ever going to need to worry about paying a federal estate tax.
When I encounter this misconception, I ask my clients a simple question: “Forget taxes for a moment. Instead, can you tell me where you want your wealth to go?”
When the discussion gets centered on assets rather than taxes, we end up having a much more productive conversation. What, for instance, will happen to a family-owned business that is of no interest to the children? Now, instead of a tax-mitigation strategy, we need a business-continuity plan, one that, no doubt, will have tax considerations as part of it. It just will not be taxes driving the decisions; it will be revenue distribution and value creation.
To which I say, “Wait a minute, you owe your children nothing.” You may, of course, want to leave your children with the bulk of your estate, but why start there?
I have often found it helpful to have an early discussion of how estate planning can be a creative exercise. Where can your lifetime’s assets best be put to use? The answer might spur some new thoughts and ideas that could, for instance, lead to the creation of a foundation that the children might take a role in leading.
The point is to take the automatic thinking out of the estate planning equation for a moment and consider your options.
To this I say, “No, you do not.”
Treating children equally sounds fine, but it is often not good business practice. Your children, like everybody else, have different skills, aspirations, hopes and dreams. The admittedly difficult decision to leave a family business to one child who shows interest and aptitude rather than to break it up into so-called equitable shares has proven to be the wisest choice for many as it puts an asset into the hands of someone who is far more likely to protect or add value over time rather than a sibling whose hopes and life ambitions may lie elsewhere.
In my experience, that is often an effective strategy but one that is far more complex than it appears. In most cases a sizable estate planning strategy involves setting up a trust either revocable or irrevocable. It is imperative to emphasize that when an asset is placed into an irrevocable trust, control of that asset is handed over to a trustee. That trustee has a fiduciary responsibility to the beneficiaries (not the grantor) of the trust, which includes both current income beneficiaries and eventual remainder beneficiaries. These differing interests can create inherent conflicts for the trustee. Problems often arise when a family member acts as a trustee when other family members are the beneficiaries. This is generally not a good idea as it can place a significant burden on the trustee and a strain on family relationships. Consider using a corporate or professional fiduciary to serve along with a family member. This can go a long way in reducing potential family conflict.
As a member of the Estate Planning Council of New York City (and one of those advisers), my reply to clients is, “That would be great, but you own this.” I have seen many estate advisers — be they CPAs, investment advisers, insurers or attorneys — work very well together, but it does not happen readily without clear direction from the stakeholder. Developing a compatible team rooted in open communications and clearly articulated roles is, to me, a prerequisite to a successful outcome of any estate.
When you are thinking about starting or updating your estate plan and related documents, these key takeaways should help you achieve your financial and family objectives: