What would happen if, at some point in your life, you became incapable of managing your financial affairs or unable to make medical decisions for yourself? What would happen to your business? Will your children be dependent upon your financial resources? Who would receive your assets when you die, when would they actually gain access to those assets, what will they have to go through, and how much will it cost them to get those assets? How will their lives be affected by the way you leave them those assets? Who would raise your children? What will be your financial legacy?
What Is Estate Planning?
Estate planning, in essence, is the process of answering these and other important questions. More specifically, estate planning is the arranging of your personal and financial affairs, and the expression of your personal wishes so that in the event of your death or incapacity, those left to oversee your health, your children and/or your financial affairs are equipped with the direction to do it efficiently and in a manner consistent with how you would do it if you could.
Estate planning is not the completion of a set of forms, it is not one-size fits all and it certainly is not something you "buy" once and then have forever. Estate planning is a dynamic process that touches on every area of your life, and may compel adjusting from time to time to adequately respond to life's changes. People, circumstances and laws change. Assets are acquired, sold, given or lost. Effective estate planning requires thought and introspection.
So What If I Don't Have An Estate Plan?
If you don't have an estate plan, the law will provide one for you. If you are incapacitated and are not able to care for yourself or your financial affairs, the law provides for conservatorship and guardianship processes to meet those circumstances. As you might guess, both are judicially administered processes that are generally protracted, public and pricey (the "3 Ps"). When you die, the law will provide a method for your assets to flow to people, as provided by law, pursuant to another judicially administered process called probate, also involving the 3 Ps. All of these processes take an inordinate amount of time, are part of the public record and are, typically, expensive relative to the net value of the estate.
While these processes may not seem too onerous, think about the following: your spouse may have to depend on the court for an allowance to pay day-to-day household expenses pending the probate of your estate. Most people believe that if something happens to them their spouse will be able to handle everything. The fact is that in these circumstances, the basic financial decisions can be suspended until a court authorizes action following a hearing. Few people would want to leave their family in that bind.
If you are not married, but have children, a court supervised guardianship of those assets would be established for your minor children, until they are eighteen at which time they will be entitled to those assets, free and clear (how you have responded if you received a large amount of money at 18 years of age, no strings attached?). More importantly, who will raise your children; who will run your business if you die while probate is pending; who will vote your shares?
So Who Needs An Estate Plan?
Everyone. For example, we recommend that the adult children of our clients have an Advanced Health Care Directive. If something happens to them, their parents will not automatically be able to gain information from medical personnel about their own children, and certainly will not automatically be able to make medical decisions for them. They are adults.
You may only have what you consider to be modest assets, but if you think about it, what you have is all you have and our experience is that people want what they have worked for to go to the people and charities they love and care about, as quickly as possible. On the other hand, if you own a business or have substantial assets, add to the costs of failing to do an estate plan, the impact of your death or incapacity on the management of the business, and on the estate tax resulting from your death.
What is your succession plan for your business? Is your partner really going to buy-out your spouse or family? What if they don't agree on a price, or terms? What if the business just doesn't generate enough cash?
The estate tax, triggered by a transfer (you leaving your assets to your children at your death), is calculated on the value of the assets held in your estate at the time of your death, inclusive of retirement accounts and life insurance, among other assets (the tax rate is about 45%). The resulting tax is due within nine months of your date of death. If most of your assets are comprised of real estate, business interests, or other assets that cannot easily be reduced to cash, how will your estate pay the tax? All too often the family business or real estate has to be sold in order to pay the estate tax.
So Why Run The Risk?
Death and incapacity are tough enough for family and friends. Do you really want to burden them with the personal and financial costs of dealing with the mess you left behind because you were simply too busy or too afraid to face reality? The fact is that most business people would never run their business, the way they take care of their personal affairs. We all will face death or incapacity; we have no real control over that. We do have control over whether the process is an added painful and expensive process, or whether we plan for the smooth and orderly care of our person if we can't care for ourselves, and the logical dissemination of our assets and business interests in the event of our death, all in a manner that is congruent with your personal wishes and aspirations for your family.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
