Estate planning doesn’t go away because of new tax law
April 26, 2018
By Martha Sullivan, CPA, CVA/ABV, CM&AA, CEPA
Partner, Succession Planning Practice Leader
Martha leads HK’s succession and exit planning services division and is a regular contributor to Wisconsin’s InBusiness digital magazine.
The new tax law passed by Congress raises the threshold for taxable estates to $11.18 million for an individual. If you’re married, the threshold may double to as much as $22.36 million. This means that for the vast majority of Americans, for now, we don’t have to think about how to mitigate our estate tax exposure.
Does that mean you don’t have to do estate planning? Um, no, nice try. It’s still vitally important to have your affairs in order and consider the many important elements of estate planning. (Plus, the law can change again sometime down the road.)
This was brought home to me recently in a profound way. A former co-worker and his wife were in their late 50s/early 60s, both working full-time plus operating a small side-business together. Two of their three kids are college age and the last child is a senior in high school. In October, his spouse passed away unexpectedly in her sleep. In March, he followed the love of his life, also passing away in his sleep. The family’s circle of friends is rallying around these young adults who face a pile of adult matters to deal with on top of their devastating grief. It’s doubtful that, given their relatively young midlife ages, these wonderful parents had updated estate plans to guide their kids through all this.
Consider just how important it is to these kids to know how their parents wanted things to be handled when the time came. While focused largely on financial elements, their estate plan should have included how to manage their personal affairs and communicated their wishes.
The reality is that our own demise is a new beginning for our loved ones. When our door closes, a new chapter and phase in their lives begins. The estate plan is our last gift to them to help them launch into this new phase. What state is your plan in? Where are you at in your own planning process?
Simply stated, your process should:
- Document what you own and owe: Build an inventory of your assets and obligations. It’s the first critical step in estate planning. Include all the pertinent contact information, including account information. If an asset, such as a 401(k) account, has a standalone beneficiary designation associated with it, ensure that the named beneficiaries remain appropriate. Update the list on a regular basis.
- Name your guardian angels: Identify individuals who you wish to empower as fiduciaries over your affairs, guardians of your children, executor of your estate, trustees of accounts, and powers of attorneys.
- Protect your loved ones: If you have minor children, outline who should care for them if you and their other parent are not able to do so. If there are loved ones with special needs, consider strategies to provide for their care, regardless of their age. Review your life insurance policies and the related beneficiary designations.
- Plan for the unexpected: Consider how you want to be cared for if you were to become incapacitated for either a short time or longer. Document where and who should care for you and what alternatives should be considered. Inventory the health, long-term care, and disability policies that you have, including contact information. Execute powers of attorney for health care and financial decisions. Prepare a living will outlining your end-of-life medical wishes and priorities.
- Document and communicate your wishes: Give careful thought to how you want your net assets distributed. Review your beneficiary designations and update them if needed. Does a last will and testament or a living trust better meet your needs for protecting and distributing your assets? Complete the appropriate legal document. Make sure trusted souls (beyond just your spouse) know where to look for the direction and documents. Set a reminder to review and update them annually, at the time of major life events and when tax laws change.
- Protect your assets: Assemble your team of advisors. Share all the information and decisions you’ve made in the prior steps with them. Work with your accountant and wealth advisor to understand strategies to minimize estate taxes. Talk to your insurance agent to ensure you are adequately protected. Hire an estate attorney to help you draw up all the appropriate documents.
If you’re a business owner, your estate plan must include planning the exit from your business. The business is likely your largest and least liquid asset. Even in grief, the company needs to protect its profitability and value while its disposition is determined. The value of the business could have a significant impact on estate taxes. If there are multiple shareholders in the company, a death will trigger clauses in the buy-sell or operating agreement, assuming there is one. If not adequately planned for, managing the estate is even more complicated and your family could end up with far less in financial assets than you hope.
Commit to completing four more steps:
- Document and communicate the business contingency plan: Consider and document what you want done with the business if you are incapacitated or die unexpectedly. Who’s in charge in which key areas? What incentives should be prearranged to encourage these individuals to help the company navigate the crisis? Should the company be sold? If yes, whom do you trust to help facilitate the sale?
- Review buy-sell documents annually: Too often we hear horror stories of buy-sell or operating agreements stuffed in the drawer after starting the business never to be looked at again until something hits the fan. Understand what the requirements are upon death or disability, the approach to value, alignment with insurance policy ownership and designations, and timelines for disposition. Do they still make sense? Does the buy-sell align with your other arrangements?
- Work on enhancing the value of your business every day: Self-sufficiency is the most important value driver in a business. That is, there are systems, processes, and people in place to ensure that the mojo keeps flowing if the owner goes away. Astute owners understand that this does not happen by accident. They build and execute business plans that recognize that the goal is to have a company that is “ready for sale” at any time.
- Plan your exit: In tandem with step nine, go through the process of planning your exit from your business sooner than later. In fact, start it today. You and your family derive considerable value from thinking through the process, understanding the pros and cons of the various options, and identifying strategies for enhancing family wealth — today, while you are still alive, as well as upon transition.
This may seem a bit daunting. It’s easy to want to kick this can down the road and ignore it, but don’t. Take one step today and another step tomorrow with your trusted advisors. They know you well. He or she wants to walk beside you in your efforts to launch your loved ones into the next phase of their lives (regardless of what the current tax law says).