Common Wealth Transfer Mistakes

A legacy plan is a vital part of the financial planning process, ensuring the assets you have spent your entire life accumulating will transfer to the people and organizations you want, and that family members are prepared to inherit and execute your wishes.  However, four common errors can derail this wealth transfer, and send individuals, families, and their legacies, off track.  Kiplinger’s recent article entitled “4 Reasons Families Fail When Transferring Wealth” explains further.

Failure to create a plan. It’s hard for people to think about their own death and the process can be intimidating. This can make us delay our estate planning. If you don’t have the appropriate estate plan in place, your goals and wishes won’t be carried out. So, it is important to have a legacy plan in place to ensure proper wealth transfer. A legacy plan can evolve over time, but a plan should be grounded in what your or your family envisions today, but with the flexibility to be amended for changes in the future.  See this article for an idea of how wealth transfer works in an estate plan and how to get the process started.  https://galligan-law.com/how-to-begin-the-estate-planning-process/

Poor communication and a lack of trust. Failing to communicate a plan early can create issues between generations, especially if it is different than adult children might expect or incorporates other people and organizations that come as a surprise to heirs. Bring adult children into the conversation to establish the communication early on. You can focus on the overall, high-level strategy. This includes reviewing timing, familial values and planning objectives. Open communication can mitigate negative feelings, such as distrust or confusion among family members, and make for a more successful transfer.

Poor preparation. The ability to get individual family members on board with defined roles can be difficult, but it can alleviate a lot of potential headaches and obstacles in the future.  This is critical for wealth transfer in roles such as executors, trustees and agents.

Overlooked essentials. Consider hiring a team of specialists, such as a financial adviser, tax professional and estate planning attorney, who can work in together to ensure the plan will meet its intended objectives and complete a wealth transfer in accordance with your wishes.

Whether creating a legacy plan today, or as part of the millions of households in the Great Wealth Transfer that will establish plans soon if they haven’t already, preparation and flexibility are essential elements to wealth transfer success.

Create a legacy plan that is right for you, have open communication with your family and review philosophies and values to make certain that everyone’s on the same page. As a result, your loved ones will have the ability to understand, respect and meaningfully execute the legacy plan’s objectives.

Reference: Kiplinger (Aug. 29, 2021) “4 Reasons Families Fail When Transferring Wealth”

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Estate Planning for the Family Farm

Estate planning for family farms is not just about the business, it is about passing your values and legacy to your loved ones.

The family is at the center of most farms and agricultural businesses. Each family has its own history, values and goals. A good place to start the planning process is to take the time to reflect on the family and the farm history, says Ohio County Journal in the recent article “Whole Farm Planning.”

There are lessons to be learned from all generations, both from their successes and disappointments. The underlying values and goals for the entire family and each individual member need to be articulated. They usually remain unspoken and are evident only in how family members treat each other and make business decisions. Articulating and discussing values and goals makes the planning process far more efficient and effective.  What’s more, effective estate planning for a family farm may help convey these values and goals to the next generation.  This is true of most businesses, but estate planning for a family farm is more than just a simple will.

An analysis of the current state of the farm needs to be done to determine the financial, physical and personnel status of the business. Is the farm being managed efficiently? Are there resources not being used? Is the farm profitable and are the employees contributing or creating losses? It is also wise to consider external influences, including environmental, technological, political, and governmental matters.

Five plans are needed. Once the family understands the business from the inside, it’s time to create five plans for the family: business, retirement, estate, transition and investment plans. Note that none of these five stands alone. They must work in harmony to maintain the long-term life of the farm, and one bad plan will impact the others.

Most planning in farms concerns production processes, but more is needed. A comprehensive business plan helps create an action plan for production and operation practices, as well as the financial, marketing, personnel, and risk-management. One method is to conduct a SWOT analysis: Strengths, Weaknesses, Opportunities and Threats in each of the areas mentioned in the preceding sentence. Create a realistic picture of the entire farm, where it is going and how to get there.  This aspect is similar to most estate planning for businesses, so see here for more detail.  https://galligan-law.com/estate-planning-with-a-business/

Retirement planning is a missing ingredient for many farm families. There needs to be a strategy in place for the owners, usually the parents, so they can retire at a reasonable point. This includes determining how much money each family member needs for retirement, and the farm’s obligation to retirees. Retirement age, housing and retirement accounts, if any, need to be considered. The goal is to have the farm run profitably by the next generation, so the parent’s retirement will not adversely impact the farm.  It may also simply be having an exit strategy and a way to monetize the farm if you choose not to continue owning or working it.

Transition planning looks at how the business can continue for many generations. This planning requires the family to look at its current situation, consider the future and create a plan to transfer the farm to the next generation. This includes not only transferring assets, but also transferring control. Those who are retiring in the future must hand over not just the farm, but their knowledge and experience to the next generation.  A key component is identifying who would operate the farm in the future, including groups of people suited to specific tasks.

Estate planning is determining and putting down on paper how the farm assets, from land and buildings to livestock, equipment and debts owed to or by the farm, will be distributed. The complexity of an agricultural business requires the help of a skilled estate planning attorney who has experience working with farm families. The estate plan must work with the transition plan. Good estate planning for a family farm may also need to address how family members who are not involved with the farm will be treated fairly without putting the farm operation in jeopardy.

Investment planning for farm families usually takes the shape of land, machinery and livestock. Some off-farm investments may be wise, if the families wish to save for future education or retirement needs and achieve investment diversification. These instruments may include stocks, bonds, life insurance or retirement accounts. Farmers need to consider their personal risk tolerance, tax considerations and time horizons for their investments.  In sum, estate planning for a family farm is essentially to protecting the integrity of the farm you’ve worked to develop and to protect the family at the heart of the farm.

Reference: Ohio County Journal (Feb. 11, 2021) “Whole Farm Planning”

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Trusts Aren’t Just for Billionaires: Reasons for a Trust

Occasionally clients are hesitant to utilize trusts in their estate plan because they “just have a simple estate” or believe they need substantial assets to warrant a trust.   In fact, trusts are for everyone and solve a variety of purposes in estate planning.  According to an article entitled “3 Reasons a trust may make sense for your family even though your name isn’t Trump, Gates or Rockefeller” from Market Watch, trusts give great flexibility in how assets are divided after your death, no matter how modest or massive the size of your estate. Using trusts in your estate plan is a smart move, for many reasons.

There are two basic types of trust. A Revocable Trust is flexible and can be changed at any time by the person who creates the trust.  This person is known by many different names based upon the convention of where the trust is established, but is often known as the “grantor” or “trustor” or something similar.   These are commonly used because they allow a high degree of control while you are living, especially if your goal is to avoid probate while being able to revise your plan in the future.  The idea is that if your trust is the owner of an asset or properly receives the assets at your death, there will be no need for a Will to be probated through the court system.

Once the trust is created, homes, bank and investment accounts and any other asset you want to be owned by the trust are retitled in the name of the trust or directed to it upon death, depending on the type of asset and what your goals are. This is a step that sometimes gets forgotten, with terrible consequences. Once that’s done, then any documents that need to be signed regarding the trust are signed by you as the trustee, not as yourself. You can continue to sell or manage the assets as you did before they were moved into the trust.

See here for a more robust discussion of how a trust works versus a will.  https://galligan-law.com/will-vs-living-trust-a-quick-and-simple-reference-guide/

There are many kinds of trusts for particular situations. A Special Needs Trust, or “SNT,” is used to help a disabled person, without making them ineligible for government benefits. A Charitable Trust is used to leave money to a favorite charity, while providing income to a family member during their lifetime.

Assets that are placed in trusts do not go through the probate process and can control how your assets are distributed to heirs, both in timing and conditions.

An Irrevocable Trust is permanent and once created, cannot be changed subject to a few caveats. This type of trust is often used to save on estate taxes, by taking the asset out of your taxable estate. Funds you want to take out of your estate and bequeath to grandchildren are often placed in an irrevocable trust.  These types of trust are becoming more and more useful as the estate tax exemption is expected to go down leaving more and more clients exposed to potential estate taxes.

If you have relationships, properties or goals that are not straightforward, talk with your estate planning attorney about how trusts might benefit you and your family. Here’s a few reasons for a trust and why this makes sense:

Reducing estate taxes. While the federal exemption is $11.58 million in 2020 and $11.7 million in 2021, state estate tax exemptions are far lower. New York excludes $6 million, Massachusetts exempts $1 million, Texas has none at all.  Some states are even more complicated in having inheritance tax (taxes are applied against the exact amount transferred).  Further, it is widely accepted that the federal estate tax exemption will be lowered as well.  An estate planning attorney in your state will know what your state’s estate taxes are, and how trusts can be used to protect your assets.  You can also see here for a recent article I wrote on life insurance trusts as a good example of a common trust used to reduce estate tax exposure.  https://galligan-law.com/the-irrevocable-life-insurance-trust-why-should-you-have-one/ 

If you own property in a second or third state, your heirs will face a second or third round of probate and estate taxes. If the properties are placed in a trust, there’s less management, paperwork and costs to settling your estate.

Avoiding family battles. Families are a bit more complicated now than in the past. There are second and third marriages, children born to parents who don’t feel the need to marry and long-term relationships that serve couples without being married. Trusts can be established for estate planning goals in a way that traditional wills do not. For instance, stepchildren do not enjoy any legal protection when it comes to estate law. If you die when your children are young, a trust can be set up so your children will receive income and/or principal at whatever age you determine. Otherwise, with a will, the child will receive their full inheritance when they reach the legal age set by the state. An 18- or 21-year-old is rarely mature enough to manage a sudden influx of money. You can control how the money is distributed.

Protect your assets while you are living. Having a trust in place prepares you and your family for the changes that often accompany aging, like Alzheimer’s disease. A trust also protects aging adults from predators who seek to take advantage of them. Elder financial abuse is an enormous problem, when trusting adults give money to unscrupulous people—even family members.

Talk with an estate planning attorney about your wishes and your worries. They will be able to create an estate plan and trusts that will protect you, your family and your legacy.

Reference: Market Watch (Dec. 4, 2020) “3 Reasons a trust may make sense for your family even though your name isn’t Trump, Gates or Rockefeller”

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