Family Wealth Planning, Part II: A Framework for Estate Planning
By Ross W. Nager, CPA and FBA Contributor
Last month, I described the first five steps involved in developing and implementing a comprehensive plan for the future of your family. Family Wealth Planning is far more than estate planning because it addresses many more issues and objectives than simply how to reduce estate taxes.
Without further ado, let s continue onward.
Step 6: Consider Liquidity Needs
There are numerous potential cash needs to address in the family wealth planning process. Examples include:
Ongoing business capital needs
Your, your spouse's and, possibly, your children's support needs
Federal and state inheritance taxes - The estate law offers two possible ways to defer tax payments, so don t panic about a forced sale of your business.
Possible need for capital to provide equivalent value from your estate to those heirs who should not inherit stock.
For any number of reasons, these needs will vary with time. They also will be affected by how much wealth transfer you accomplish during your lifetime. The reasonably expected needs should be considered throughout the estate planning process. You may choose to solve them immediately or over time. Consider life insurance; aggressive estate planning to reduce taxes; and/or changing business priorities to increase available capital. Gosh, you might just have to start doing a little saving! Keep in mind that the liquidity needs may outgrow 'static' solutions, like life insurance.
Step 7: Start with the Essentials I find it easier to do family wealth planning in bite size chunks, particularly for larger estates. Otherwise, it's just too complicated. People get bogged down and never get anything accomplished. It's OK to do it piecemeal, but you and your advisors need to develop an overall plan first. Then implement its components over time. Step back occasionally and look at the big picture to make sure the pieces fit together.
No matter what else you may choose to do, you need a will and, possibly, a revocable trust, health care power of attorney and a living will. Your spouse needs them, too. Even though it's not much fun, the process of addressing will-related issues will be relevant to other family wealth planning steps discussed below.
However, please do not stop there. Those documents will not raise your children, run your business, make appropriate investments or cause your kids to get along with each other.
Step 8: Consider Lifetime Planning Techniques The key to lifetime planning techniques is to start with the simplest and proceed to the more complex. Generally, people of more modest means should use only the simpler techniques. For example, you and your spouse might make your $11,000 annual exclusion gifts. If you don't feel 'wealthy' enough to do that, make smaller gifts and don't waste time with the complicated techniques.
Larger estates should not rely on a single technique. Diversification of techniques is the watch word for two reasons. First, most are subject to some degree of IRS challenge and many are subject to economic risks. It's a little like stock market investing. Don't put all your eggs in one basket. Second, you will probably need more than one to accomplish your objectives.
Don't select techniques based solely on their tax saving potential. They must fit your family and business facts and objectives. (This might be a good time to refer back to Steps 1 through 4.)
Perhaps more importantly, you will need to focus on techniques that have nothing to do with estate taxes. You may need to develop strategies to train family members or to help them develop communication skills. Just as there are ways to deal with estate taxes, there are ways to resolve most of the pressing concerns that you face.
Step 9: Project Potential Effects Before implementing any of the techniques in Step 8, you should try to project their effects into the future. Yes, I know that you can't predict the future. But, try playing 'what if' games. What if there is a stock market decline? What if one of my children suffers an accident? What if one of the kids decides to become active in the business? What if my inactive kids disagree with active kids as to business priorities? What if the tax laws change?
Think ahead 10 or more years and envision various business, economic and family scenarios. For example, you might be surprised how many times I ve seen grandparents transfer significant wealth to their grandchildren. Then, an unexpected new bouncing baby turns up and the tax law makes it untenable to catch the new little fella up to his peers. A little advance thought would have solved this problem. Quiz your advisors about how to build flexibility into your plans to handle future uncertainties.
Step 10: Educate and Motivate Your Heirs Recognize that even the best paperwork maneuvers and manipulations do not create ability, understanding and accommodation in and among your heirs. Therefore, a complete family wealth plan requires a lifetime of activity that transfers not just ownership, but also philosophy and understanding.
This activity includes educating your children in the responsibilities of business ownership and helping your heirs to develop skills and processes to resolve differences of opinion. There is so much that they must know and understand. Chances are that omitting this step as an ongoing activity will result in the failure of the dreams you identified in Step 1. Just read The Family Business Advisor to get ideas.
Unfortunately, I have run out of space with only three steps to go. We'll wrap this up next month. I know this is really exciting for you, but please be patient.
Part One: Focus on Life - A Framework for Estate Planning