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CEO Best Practice: Estate Planning

Executive Tools

  • Executive Summary
  • Self Assessment Checklist


Expert Practices Articles

  • How Estate Taxes Work
  • Why Do Estate Planning?
  • Creating the Estate Plan
  • Principles of Estate Planning
  • Estate Planning Tools
  • Using Trusts Properly
  • Communication Tools
  • Divvying Up the Estate

Case Histories

  • Keep Board Small and Always an Odd Number
  • Use Board for Strategic Issues
  • Invite Seasoned Business Leaders to Serve on Board
  • Start Out with an Advisory Council
  • Establish Clear Objectives and Expectations
  • Comprise the Board Primarily of Outsiders

Tools & Analysis

  • Self Assessment Checklist
  • Top Ten Tools for Creating a Great Board
  • Qualities of the Best and Worst Corporate Boards
  • Top Ten Tools to Bring Any Board Up to Speed
  • Top Ten Tools for Making Boards More Effective
  • Nine Principles for More Effective Boards
  • Ask Ten Questions Before Joining Any Board

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How Estate Taxes Work

Three specific taxes apply to estate planning:

  1. Estate taxes apply when you transfer assets to someone else upon your death. At that time, the government taxes your right to transfer those assets.
  2. Gift taxes were instituted to prevent people from gifting away assets upon their deathbeds.
  3. Generation skipping transfer taxes (GSTT) prevent wealthy taxpayers from leaving their estates to their grandchildren in order to pay one generation of estate tax instead of two.

Many people believe that estate planning involves a very aggressive approach that will land them in hot water with the IRS. On the contrary, says Hokanson, estate planning represents one of the safest and most secure strategies your accountants and attorneys can use. The key is to recognize that Uncle Sam wants you to give to charity rather than pay taxes and to use the tax codes accordingly.

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Why Do Estate Planning?

Most business owners know they face sizeable estate taxes, yet few do anything about it. According to Wolff, 85 percent of wealthy Americans do only the most basic estate planning. Of the 15 percent that attempt advanced estate planning, the majority fail to accomplish their intended goals. Worse, of family businesses that fail after being passed on to the next generation, 97 percent are forced to sell the business in order to raise the cash to pay estate taxes. Wolff attributes much of the high failure rate to basic human nature.

"Every year, untold millions of dollars are unnecessarily lost to estate taxes because of the dreaded 'P' word -- procrastination," he explains. "It takes a highly motivated individual to invest their time and energy into planning something that will benefit others, especially when you consider that the person won't be around to see the results of his or her hard work."

According to Daniels, proper estate planning does far more than just reduce or eliminate estate taxes. It also:

  • Prevents children and grandchildren from fighting over money, the business and "sentimental" items in the estate
  • Prepares children and grandchildren for the wealth they will receive

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Creating the Estate Plan

To provide a blueprint for your estate plan, Hokanson recommends creating a "family wealth vision." This vision, typically expressed through a written "family letter of intent," answers such critical questions as:

  • What are we trying to achieve as a family?
  • What legacy do I want to leave for those who come behind me?
  • How do we want to distribute the family wealth?
  • What goals do we hope to accomplish with this distribution?

"Having a family vision helps your advisors understand exactly what you're trying to achieve, thus ensuring that you drive the planning process rather than your attorney or tax advisor," explains Hokanson.

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Principles of Estate Planning

Before engaging in estate planning, say Hokanson and Daniels, it helps to understand several "big picture" principles:

  • Estate planning involves more than just money. According to Hokanson, estate planning (which he calls "family wealth counseling") should address three separate aspects of family wealth: financial, social and spiritual.
  • It's the people, not the documents. According to Daniels, documents play an important role in the process, but people make the real difference.
  • Communication = success. The ultimate success or failure of your estate plan lies in how well you communicate to your advisors, family and anyone else affected by the disposition of your estate.
  • Educate your children. Lack of education can ruin even the best of estate plans. For that reason, Daniels recommends continually educating your children in how to handle money, how to be good business people (in any business) and how to succeed in life.
  • Do no harm. In addition to minimizing taxes, an estate plan should ensure that your children have financial incentives to work hard and become contributing members of their communities, prevent family conflicts, prepare your children and grandchildren for the wealth they will receive, protect against divorce and protect your assets so the business continues.

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Estate Planning Tools

According to our experts, the following tools form the basic foundation for any effective estate plan.

  • Wills are legal documents that specify what happens to your assets when you die. If you do nothing else in the way of estate planning, at least have a will.
  • Trusts are legal entities that can own assets, are managed by one or more trustees and have designated beneficiaries. They play a vital role in estate planning because they allow you to control and protect assets while minimizing tax liabilities.
  • Life insurance is typically used as a source of funds for buy-sell agreements and paying estate taxes.
  • Family limited partnerships (FLPs) allow you to receive discounts when making gifts or transferring assets, protect assets from creditors and lawsuits, shift taxable income and remove highly appreciated assets from the estate.

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Using Trusts Properly

Trusts allow you to control and protect assets while minimizing tax liabilities. For estate planning purposes, the most commonly used trusts include:

  • Funded living trusts contain and hold title to all your major assets (except for your home) while you are alive. Their primary purpose is to give you immediate and total control over your assets should you die or become disabled.
  • QTIP (qualified terminable interest property) trusts enable the surviving spouse to receive income from assets during his or her lifetime while passing on ownership of the assets to the designated beneficiaries (usually the children).
  • Charitable trusts are typically used to gift high-value assets out of the estate in order to avoid capital gains and estate taxes and create income for senior members of the family.
  • Family legacy trusts are used to reduce or avoid taxation at each generation.
  • Enhanced income trusts eliminate capital gains taxes at the sale of an appreciated property. A secondary purpose involves removing assets from the taxable estate and eliminating all estate taxes.
  • Deferred inheritance trusts are used to create a charitable endowment within your family foundation. They are typically used by families who want to include current giving in the estate plan.
  • Family foundations are generally set up as the beneficiaries of enhanced income trusts. They allow you to create an endowment that your family completely controls, support charitable activities and receive compensation for your charitable work.
  • Asset replacement trusts remove your life insurance policy from your estate, thereby avoiding any estate taxes.
  • Grantor retained annuity trusts (GRATs) allow you to retain the right to the income stream when you transfer discounted assets to a family limited partnership.

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Communication Tools

In nearly one-third of all estates, the children end up fighting over something, usually sentimental or valuable items. These family feuds often last for years. To avoid conflict among siblings, Daniels recommends two "family auctions" whereby the children bid on the items they want.

The first auction involves purely sentimental and nominal value items. The second auction involves more valuable items, such as expensive jewelry, artwork, collectibles, the family home and recreational properties. In each case, the children bid on the items they want the most, with the first auction using poker chips and the second auction using the real value of the estate.

"These two auctions reduce or eliminate competition between siblings and force each child to answer the question, 'How much do I want this item compared to that one?'" says Daniels. "Plus, the auction process treats everyone fairly, a major issue when settling estates.

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Divvying Up the Estate

In nearly one-third of all estates, the children end up fighting over something, usually sentimental or valuable items. These family feuds often last for years. To avoid conflict among siblings, Daniels recommends two "family auctions" whereby the children bid on the items they want.

The first auction involves purely sentimental and nominal value items. The second auction involves more valuable items, such as expensive jewelry, artwork, collectibles, the family home and recreational properties. In each case, the children bid on the items they want the most, with the first auction using poker chips and the second auction using the real value of the estate.

"These two auctions reduce or eliminate competition between siblings and force each child to answer the question, 'How much do I want this item compared to that one?'" says Daniels. "Plus, the auction process treats everyone fairly, a major issue when settling estates.

Request the Entire Best Practice Module: Estate Planning