Estate Planning: Doing Your Homework Before Meeting with AdvisorsOctober 2008
An estate plan outlines a course of action for the distribution of assets. Think of it as the constitution of your family dynasty—it outlines the principles by which family wealth is managed. The most important element in the estate-planning process is the establishment of your personal vision.
Your vision reflects your philosophy on wealth and inheritance. Things to consider are:
- Needs and abilities of family members
- Which family or non-family members are most apt to manage wealth without your involvement
- Desire for the continuation or liquidation of the family business
- Interest in charitable giving
To further establish your vision, imagine that you live in a tax-free world where there are no limitations on wealth distribution. Then determine how you would like the family wealth divided and who should manage it.
If you leave the process up to your tax and legal advisors without well-defined goals, you may end up with a technically perfect estate plan that is not appropriate for your family.
Once a plan is established, you are ready to talk to your attorneys and accountants. It is your job to figure out what is best for your family, and your advisor's job to develop a structure that achieves your goals in the most tax-efficient manner.
Marshalling the Facts for Your Advisors
Your attorneys and accountants will need a great deal of information about your assets and your family. The more information you provide them, the better they will be able to craft an estate plan that addresses the pertinent tax and legal issues.
Assets and Liabilities
The first step is to prepare a complete inventory with values of your assets and liabilities. Some of the asset classes are obvious, including marketable securities, cash, real estate, art and antiques, jewelry and business interests.
Others, such as intellectual property, trust interests and contractual rights are less obvious and apt to be overlooked. However, all are important to your estate plan.
Note whether assets are owned by you alone or jointly with your spouse. Joint property that passes by survivorship will go to your co-tenant automatically and will not be affected by the provisions of your will.
If assets are owned through trusts or other entities, or if you have created trusts, endowments, charitable foundations or other entities during your lifetime, be sure to provide copies of the governing documents.
Finally, be sure to add a list of all your liabilities, including mortgages and bank debt, as well as a listing of any contingent or unlikely claims that might arise.
Residence, Citizenship and Governing Law
The law governing the transfer and taxation of your property will be dependent on one or more of three factors:
- Location of property
Your citizenship and the location of your property are relatively easy to determine. What is more difficult to determine is your legal residence or "domicile." This determination involves complex issues. Let your legal advisors make the determination based on facts that you provide:
- Where are you currently considered a resident for tax purposes?
- Where have you been considered a resident for tax purposes in the past?
- Have you ever changed your residence?
- What was your residence at birth?
- Besides your chief residence, do you own residential real estate or spend time elsewhere?
Giving this information to your legal advisor is important even if you believe that your domicile is clear. Your advisor may feel that more than one jurisdiction is in a position to claim you as a resident, and there may be steps that should be taken to avoid problems. For example, some jurisdictions require that a prescribed percentage of your assets be left to your children. If you are a legal resident or even own real estate in such jurisdictions, their laws may apply to some or all of your assets.
Taking Your Descendants' Taxes into Consideration
Your primary focus will be on how your own assets will be distributed and taxed. However, the way you structure your estate can also affect how your descendants will be taxed.
Often an estate plan can be structured to give substantial tax benefits to future generations. Be sure to provide your attorney with all relevant information about your descendants, including their citizenship and residence and a disclosure of any existing trusts or similar structures in which they are beneficiaries.
Selecting Your Executors and Trustees
Selecting people to administer your estate and act as trustees requires a good deal of thought. Executors or other personal representatives are responsible for making an inventory of your assets, paying debts and death taxes, dividing your assets in accordance with your will, and dealing with legal and financial issues.
This responsibility could be a five-year endeavor, involving numerous important decisions. You may want to consider utilizing co-executors, with one being an individual and one a corporate executor.
A corporate executor, for example, a bank or trust company, will have expertise in areas crucial to carrying out the many duties involved in settling an estate. A personal executor, who will contribute knowledge of the family and your intentions regarding distribution of assets, can complement the responsibility.
Acting as a Trustee is a Long-Term Commitment. Trustees are responsible for investing the trust assets (with an understanding of the rules of trust investment), making discretionary distributions, and generally carrying out the terms of the trust. Often, they are also involved in the process of selecting their successors.
There is no simple rule for choosing fiduciaries, be it an individual or a firm. You should, however, be confident that your choice is qualified for the role, meaning they exhibit common sense and are persons with whom you are comfortable entrusting the management of your family wealth.
In the case of trusts, it is a good idea to include a mechanism for removal of any trustee who is not performing well or who is no longer favored by the family.
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