11/4/24

Family Lifestyle Continuity In Place

Incredible Result: “I love my Family. Let’s be clear. I am protecting them.”

Avoidable Train Wreck: Inadequate Estate Plan controls damage your Company and deplete family wealth.

Main Play: The Business Owner Estate Plan

What This Is: You have directed who receives your estate and who is in charge when you can’t be. And you have provided your family with enough cash flow (from your business, investments and insurance), with careful timing, distribution and spendthrift controls, so your family’s lifestyle can continue upon your disability or death.

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Over the years, we have seen many family business leaders who brilliantly and very successfully operated their businesses during their lifetime, only to leave a mess or a disaster to be sifted through and sorted out by a surviving spouse or children upon their death or disability.

This is the type of final act which they generally did not intend to leave, but it was the direct result of their failure either to establish an Estate Plan or to establish an Estate Plan which was properly tailored to them as a family business owner.

The Business Owner Estate Plan

The Fourth Quarter Planning process is being used by Family Business Pioneers to also address the lifestyle continuity they want for themselves and for their family upon their death or disability. Business owners have unique and more involved details which need to be addressed in a tailored Business Owner Estate Plan suitable for business owners.

When Family Business Pioneers have stopped to consider the likely outcome of their present course, they are seeing the need to detect those items which were missing, the presence of which will provide a substantially better outcome for the legacy they wish to leave for their families.

This action addresses the financial security plan you want to leave – to prevent a mess that needs to be cleaned up by others and to have an Estate Plan which fits with your Fourth Quarter Game Plan.

Establishing Your Business Owner Estate Plan

As an initial starting point in the review of the health of your Estate Plan, the elements of a good fundamental Estate Plan are essential. These initial elements consist of the following carefully considered tools, each with the following objectives:

• Financial Power of Attorney. If you were to become disabled to the point at which you are unable to handle your financial affairs, the laws in almost all states provide you and your family with two main alternatives for addressing your ongoing financial matters during the course of your disability. First, your family could file an application for the appointment of a conservator with the local probate court. Under this alternative, the family would typically need to hire an attorney to represent the family in court, during which time the family could recommend the appointment of a specific person by the judge to handle your financial affairs. This person has the legal title of a “conservator”. Once appointed, the conservator is obligated to periodically report back to the court to summarize the financial matters which he or she handled on your behalf. The other alternative is for you to execute a durable financial power of attorney before you are disabled. This is the preferred option, since it provides a step which you can take in advance to designate a person (and successors) to handle your financial affairs for you. Then, upon your disability, no court process is needed. Instead, the person you appointed is able to immediately step in to privately deal with financial matters as needed.
• Health Care Power of Attorney. The law provides you with two similar alternatives for dealing with your health care matters if you are disabled and unable to do so. First, your family can make an application to the local probate court to have someone appointed as your “guardian” to handle your medical affairs during your incapacity.  The second alternative is for you to execute a durable health care power of attorney before you are disabled. Under this type of tool, you can designate in advance the person (and successors) whom you would like to privately handle your medical affairs should you be unable to do so.
• Health Care Directive (Living Will). Most people understand this tool as the “pull-the-plug” document. State law allows you to execute this type of advance directive which provides the legal authority to your physician and to the hospital to withhold or withdraw medical treatments which are considered to be ethically extraordinary, i.e. those which present a disproportionate burden compared to the potential benefits. If this instrument is not executed in advance, then your family and health care providers are left to attempt to determine your wishes and may be in a position to be unable to legally implement them.
• Pour-Over Will. This is the type of Will which is typically used today for persons who wish to avoid the probate court process. As will be discussed next, this probate court process can best be avoided through the use of a Living Trust. The Pour-Over Will is used in conjunction with a Living Trust in order to transfer property into the trust upon your death, to the extent of property which you did not transfer into your Living Trust during your lifetime. The Pour-Over Will is also used by parents who have minor or disabled children, as a means to appoint a guardian and conservator for those children. The Pour-Over Will is also used to appoint your personal representative (executor) for your estate.
• Estate Plan Letter. This document is a detailed, practical tool which enables you to specify certain wishes, and to detail certain information prior to your death, so that this information is available for your family. This specifically contains directions relating to your funeral and burial wishes, special gift of personal effects and mementos to your family and friends, a record of your key advisors and close friends, details specifying the location of your key financial and business records and instructions for raising your minor children.

The Living Trust

The Living Trust (also known as a Revocable Trust) has become the tool of choice for parents across the country who want to maximize the Estate Planning opportunities and protections available for their families.

In essence, a Living Trust can be viewed as a bucket which you have created into which you have placed the instructions for how you would like your assets to be handled upon your death.

This set of instructions can include the provisions for distributing your estate to your spouse, provisions for holding your estate in trust for your children, and/or grandchildren for distribution upon certain terms or upon certain ages, and can include provisions detailing your charitable bequests. These instructions are completely revocable and completely amendable by you up until the date of your death.

Typically a separate Living Trust will be executed by the husband and by the wife (although depending on your financial net worth, a joint Living Trust can be utilized). The Living Trust will also typically contain the provisions which can be utilized to help attain the full lifetime federal estate tax exemption for both the husband and the wife.

You may have heard that Living Trusts can be referred to as a funded Living Trust or an unfunded Living Trust. Typically, in both situations, the Living Trust is the same. The difference is whether you have re-titled your assets into the name of your Living Trust.

This is essentially equivalent to an empty bucket (containing only your set of instructions) or a full bucket into which you have placed your assets along with your set of instructions. If you placed ownership of your assets into your bucket during your lifetime, then upon your death, there is no need for the probate court process, because you have already handled the re-titling which the probate court would otherwise accomplish.

In essence, you have filled your bucket and, by naming appropriate persons (known as successor trustees) as part of your set of instructions, your bucket is automatically handed off by you to your successor trustee upon your death. Your Living Trust can also contain provisions which state that if you are disabled, then your Living Trust bucket is also handed off to your successor trustee during that period during which you are disabled.

Comparing The Difference A Living Trust Can Make

During your life your Living Trust can:

• Allow you to manage and have total control over the assets of the Trust during your life.
• Allow you to amend or revoke your Trust any time for any reason.
• Allow you to add property to, or take property out of, your Trust at any time.
• Protect against conservatorship proceedings (or living probate) if you become legally incompetent or disabled.

After your death your Living Trust can:

• Distribute your assets to your spouse, children or other heirs as you’ve directed or continue to hold your assets in trust for certain beneficiaries (such as minors, young adults, grandchildren and spendthrifts) until an age or ages when they are financially responsible.
• Include special protection provisions to safeguard children or grandchildren who have substance abuse, dependency or other special issues.
• Name a Trust Protector to oversee the Trustee and make certain critical decisions.
• Include supplemental needs trust provisions to help preserve government benefits for disabled children or grandchildren.
• Avoid or substantially reduce estate taxes, depending on the size of your estate, by obtaining the $11,200,000 (as of 2018 under the Tax Cuts and Jobs Act of 2017) lifetime estate tax exemption for both spouses for married couples (total $22,400,000 exemption).
• Avoid probate for all assets and property transferred to the Trust during your life.
• Receive all assets probated after your death from your Will that were not transferred to the Trust during your life.
• Receive all life insurance and retirement plan proceeds where you’ve named the Trust as the beneficiary.
• Reduce the risk of a Will contest and court challenges to your Estate Plan.

Pre-Funding Personal Financial Gap Needs

Upon your (or your spouse’s) death or disability you and your family will obviously face a different financial landscape than that which you would be facing without this adversity. The scope and extent of this is best addressed through a detailed Financial Needs Analysis performed by a Financial Advisor.

For example, if you and your family rely on your salary to cover living expenses and personal debts, the failure to have sufficient life insurance or disability insurance payable on your death or disability will either result in a financial shortfall to your family or could put a bind on your business if the business needs to both replace you and continue to pay your salary.

In addition to covering living expenses, your death could result in estate taxes, which may also put a bind on your family or your business if your ownership needs to quickly be turned into cash.

The Fourth Quarter Planning process can estimate your present ability to meet these needs and recommend changes to improve your shortfalls.

Business Owner Estate Plan

Business Owner Estate Plans generally should address several other matters beyond those detailed above, such as:

• Allocation of business ownership and control.
• Family business retention or sale
• Successor Leadership
• Income and Estate Taxes
• Debt financing or pay off.
• Personal guarantees.
• Family personal and financial dynamics

Some of this is addressed in the Living Trust or in the other Main Plays discussed in the Estate Playbook.