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.
Misconception No. 1: An estate plan should be based solely on tax mitigation.
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.
Misconception No. 2: I should leave everything to my children.
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.
Misconception No. 3: My children are so very different but to be fair, I must be equitable with my estate plan.
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.
Misconception No. 4: I will set up a trust. That will take care of everything.
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.
Misconception No. 5: My estate advisers have my best interests in mind, and they are working together for me as a team.
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:
- Start your process broadly, thinking about what you want to happen to your wealth and family legacy. Then you can move on to developing a plan in the most tax-efficient manner.
- Do not fall into the trap that everything must be divided equally among your descendants. Match your assets to your children.
- Use trusts only if they assist in achieving your overall goals regarding passing your wealth on to the next generation.
- Give clear direction to your professional advisers so that they can work as a unified team to help you achieve your estate planning goals.
Christopher D. Wright, JD, CPA, Partner in the Tax Practice at Marks Paneth LLP, focuses on estate planning and gift, estate and trust taxation. With over 30 years of experience in accounting, tax and nonprofit organizations, Mr. Wright is adept at working with clients and their professional advisers to assist in developing estate plans that provide both estate tax savings and efficient transfer of assets to the next generation and to charitable organizations.
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