“Life moves pretty fast. If you don’t stop and look around once in a while, you could miss it.” This quote may have come from notorious class-cutter Ferris Bueller during his famous day off in 1986, but wiser words have never been spoken. They ring even more true for entrepreneurs and owners of closely held businesses.
Life moves fast for all of us, and whether you’re still growing your business or have already sold it to enjoy the fruits of your former labor, it’s easy to focus solely on your day-to-day life without thinking much about the future. For this reason, it’s important to step back and plan for your ultimate wealth distribution by putting together an estate plan. The good news is that the seemingly onerous process of estate planning is made simpler by putting the right team in place.
Who You Need on Your Estate Planning Team
Business owners’ schedules are consumed by the day-to-day challenges of their company’s operations. Therefore, they rely on experienced professionals to navigate the avenues of their personal financial matters such as legal, accounting, tax, and financial planning. What many entrepreneurs don’t realize, however, is the benefit of bringing these professionals together to implement a collaborative approach with experts from each of these practice areas. Nowhere is this more valuable than in estate planning, where each of these financial arenas play a significant role. Having the right estate planning team in place is the most important step you can take to ensure your assets are passed down in the manner you desire. Let’s dive into the benefits that some of these professionals can contribute to an estate plan:
The Benefits Key Advisors Bring to the Estate Planning Process
Attorneys are essential in ensuring that the mechanics of an estate plan coincide with federal and state asset transfer laws. They also provide key insight into the probate process, and invaluably, draft the legal documents that make up your estate plan such as wills, trusts, and powers of attorney. These documents are discussed in more detail below.
Accountants have the benefit of frequent check-ins with their clients, necessitated by quarterly tax calculations and the annual filing of returns. This recurring back-and-forth dialogue gives them a bird’s eye view of their clients’ financial landscape which ensures that income and estate planning goals are clearly understood and met. Their knowledge of ever-changing estate and gift tax laws allow them to work with attorneys and the client to make the plan as tax efficient as possible.
Years of discussions surrounding long term goals give these advisors crucial insight into their client’s situation. Due to their focus on clients’ individual portfolios, it’s common for these advisors to have an even clearer picture of existing assets than the client themselves. They also provide a wealth of knowledge regarding retirement tools and insurance planning that makes them a key member of an estate planning team.
Once you have assembled your estate planning team, you should have confidence in the resources needed to act on your plan. Let’s walk through the basic steps to establish and execute a solid estate plan:
5 Steps to Successful Estate Planning
1. Take Inventory of Your Assets
Your assets are what your estate plan is based around, so it is essential to have a good understanding of what you own and how much it is worth. This should encompass all types of assets, including tangible property (homes, cars, jewelry, furnishings, collectibles), businesses, financial accounts (checking, brokerage, etc.), outstanding loans you are owed, and more.
2. Understand Your Family’s Needs
All families have unique needs. Primary considerations include health costs, developmental needs, and overall cost of living. It is understood that your goal is to leave your heirs with enough to care for unique needs and have the means necessary to maintain their lifestyle.
3. Draft Essential Legal Documents
As mentioned previously, it is vital to have an attorney on your team who can ensure the mechanics of your plan coincide with federal and state laws and prepare the documents to execute it. Here are four documents essential to any estate plan that can help ensure your hard-earned wealth ends up where you want it to.
- Last Will and Testament – The first document that comes to mind for many in estate planning is the Last Will and Testament. This document specifies who will be the beneficiaries of one’s estate, which beneficiaries receive certain assets, and who will be the personal representative working with the probate court to ensure the will is carried out. While a Last Will and Testament is essential, relying solely on a will and subjecting all your assets to probate can be a time-consuming and messy process. This can be avoided by placing your assets in a Living Trust as explained below, but in any case, this is still an important document to serve as a “catch-all” for any assets that are not titled to a trust upon your death.
- Living Trust – Many wealthy individuals and families have a “trust-based” estate plan in which most assets are passed to heirs through a revocable living trust (in contrast with a will-based estate plan where everything is passed down via the Last Will and Testament). A living trust is its own legal entity that an individual can transfer assets into during their life. When an individual transfers assets into their living trust, they still retain control over those assets and have unfettered access to them. Assets can be transferred simply by changing the title on financial accounts, property, etc. from your personal name to the name of your trust. The primary benefit of doing this is that in contrast with a will, using a trust to transfer assets allows you to circumvent probate. Additionally, a living trust can provide more flexibility for passing assets to beneficiaries.
- Durable Power of Attorney (POA) – This document allows an individual, in this case known as the principal, to grant an agent the power to act on the principal’s behalf. This is invaluable when an individual becomes incapacitated and can no longer handle their own affairs. The powers granted to an agent typically include the ability to oversee financial accounts, liquidate assets, and obtain insurance, among other things. When drafting a durable POA, the principal has the option to grant an agent only limited authority, rather than broad authority which gives the agent a wider range of powers. It is important to note that a durable POA terminates on the death of the principal, meaning the appointed agent cannot act on behalf of an estate once the principal has passed away. In most cases, a separate POA must be drafted to appoint an agent to make healthcare decisions for a principal, in addition to any POA governing financial matters.
- Living Will – Like a durable POA, a living will is used when an individual becomes incapacitated, often through a medical condition or emergency. The difference between a POA and living will is that while a POA gives another person the ability to make decisions, a living will provides direction itself by explicitly stating what actions should be carried out. For example, if an individual develops a serious medical condition and is unable to communicate their wishes with medical professionals, the living will includes direction on what type of life-prolonging methods should or should not be performed, and can include specific preferences that are consistent with one’s personal beliefs.
4. Review Your Beneficiaries
Even though you draft a will and trust, beneficiary designations on specific assets will trump what is laid out in those legal documents. For example, if a particular family member is designated as the joint owner or beneficiary on a checking account, that asset will pass to that designated beneficiary before the will or trust is considered. This is especially important for assets that accumulate a high value like retirement and insurance accounts. You should be diligent in considering who to list as a beneficiary when you set up accounts, and proactive in updating these beneficiaries for any changes in your life, such as divorce or the passing of loved ones.
5. Consider Estate Taxes
Taxes are the single greatest expense that individuals incur over the course of their lives, which makes the idea of taxes after death a tough pill to swallow. While the current federal estate tax exemption is a lofty $12.06 million (scheduled to be cut in half in 2026), many states have estate and inheritance tax laws that force individuals with less wealth to consider their potential death tax liability. The complexity of these laws make it crucial to consult your accountant and attorney to ensure your assets pass as tax-efficiently as possible.
Remember to Update Your Estate Plan After Life Changes
Once your plan is drafted, it is comforting to know that you have checked the estate-planning box and put a plan in place with many years to spare. However, it is imperative to remember that your estate plan is a living, breathing thing that needs to be reevaluated as life goes on. A lot can change over the course of a few years, especially for entrepreneurs who are frequently reassessing their goals and financial situations as their businesses evolve. Failing to update your plan after life changes can erase the benefit of drafting a plan early on and prevent your heirs from utilizing the wealth you have worked so hard to attain.
Continue the Conversation
If you’d like to learn more about estate planning and how we can help you, please reach out. Our private client services team can help you assemble the right team and guide you through the steps involved in estate planning. We look forward to connecting.
*Written in collaboration with Senior Accountant Ben Finzel