Plan for the Unexpected

For many, if not most entrepreneurs, life is hectic, demanding and fast paced. Indeed, for most executives, the inbox is always full, leaving very little time for personal matters such as estate planning. Yet, if the executive fails to take the time to plan for disability or death and luck runs against him, this same business that was his life's work and the family he supported through this business, will be at risk of financial catastrophe.

In the second in a series of articles discussing estate planning, business succession and exit strategies, John E. McCullough, Esq., a partner at the boutique estate planning law firm of McCullough & Nicholas, P.L.C., Alexandria, Virginia, details the basics of estate planning with clarity and precision. The subject may be somewhat painful, but the information presented in John's article is absolutely vital. Read it and learn.

This article is intended to familiarize executives with the basics of estate planning and is intended to impart to the reader the importance of having a plan for the unexpected so that the entrepreneur's life work becomes a legacy rather than a failure for having neglected something that may seem remote but happens to individuals and families every day all over this country as a result of disability or death.

ESTATE PLANNING DEFINED

To begin, we need a definition of estate planning. In our firm we define estate planning as controlling your property while you are alive, caring for yourself and your loved ones should you be become disabled, and allowing you to give what you have to whom you want, the way you want, when you want, and, in doing so, save every last tax dollar, attorney fee, and court cost possible. With this definition in mind let's look at what happens if you fail to plan and how we can prevent the problems that result to families and businesses as a result.

If you fail to put in place an estate plan the consequences can be severe. Should you become disabled, the court, not you, your family, or trusted associates, will choose a conservator to run your business and appraise, inventory and manage all of your assets. Of course, the conservator, attorneys and others will be paid from your assets. Most importantly, a person unfamiliar with your business will be in charge, supervised by a Judge who likely has little, if any, business experience. Finally, all of the above will be a matter of public record.

If you die, your estate will be subject to probate. Again, your assets will be valued and listed in the public record. Your creditors will be notified so they may make a claim against your estate. Of course, fees will be paid to those appointed by the court and your business will again be run by an individual selected by a Judge.

After the creditors are paid, your remaining assets will be distributed pursuant to state law, which could result in your children, rather than your spouse, getting most of your estate.

TWO BASIC TYPES OF ESTATE PLANS: Will Centered or Trust Based

Obviously, any savvy entrepreneur would like to avoid the foregoing. The question then is- what is the best approach? There are two basic types of estate plans- will centered or trust based. Let's examine them both.

If your estate plan is will based, you must recognize that the will is effective only upon death. This requires you to rely on a power of attorney, naming a person you trust to manage your affairs should you become disabled. But what happens if the power of attorney is not recognized by third parties? The answer is a court will determine who is in charge and the business and your assets are then controlled by someone selected by a Judge rather than you.

In our practice and to avoid uncertainty, we recommend the establishment of a revocable living trust. We believe it is the vehicle that best assists us in meeting our definition of estate planning in that it allows you to control all your affairs and assets both during and after your life and minimizes fees and costs, thus preserving your wealth. Such a trust is a contract between yourself (the grantor) and yourself (the trustee), that provides a set of instructions concerning the holding and a ministering of trust assets. Upon death or disability a successor trustee, named in the document, takes over and manages the trust according to the instructions set forth therein. The fact that the trust is revocable allows you, but no one else, to amend or revoke the trust as you see fit.

BENEFITS OF REVOCABLE LIVING TRUSTS

A living trust can allow you to do the following:

  • Provide for your disability by appointing someone to manage your affairs according to your instructions;
  • Create a common trust to provide for your minor children or a special needs trust to provide for a handicapped child;
  • If your heirs are poor at handling money, you can name an independent successor trustee and include spendthrift provisions so your heirs are not at risk in the event of lawsuit or divorce;
  • You can avoid both a conservatorship if you become disabled and probate at death;
  • Your affairs will not become a matter of public record.

These are but a few examples of the things you can accomplish with a living trust centered estate plan. Of course, such a trust has limitations and if your estate exceeds the value of your federal estate tax credits (currently 1.5 million per person), other vehicles may be employed for tax planning purposes.

While this is but a cursory overview of basic estate planning, it is our hope that it prompts you to make an appointment with a qualified estate planning attorney to begin the process of creating a plan designed to protect you, your business and your family.

John E. McCullough, Esq., a partner at McCullough & Nicholas P.L.C., can be reached at jem@mntaxlaw.com.McCullough & Nicholas, P.L.C. specializes in estate planning and in structuring tax-deferral and asset protection strategies for high net worth individuals. In particular, the firm focuses on helping clients manage the impact that liquidity events have on their personal assets by emphasizing pre-event planning. John is a contributing author to the book, Generations, and is a nationally known speaker on estate planning.