As the Holiday Season fades slowly, many of you have probably focused more attention on your families than at other times of the year. That makes this the perfect time to talk about the real purpose of good estate planning. Much of what we do for our clients seems to center around, and produce, millions of dollars of tax savings. But, in reality, tax savings are nothing more than one of the tools to achieve our clients’ goals that we use in Estate Planning. Those goals almost always focus on leaving a legacy that will help our clients’ families. Sometimes, the key to helping those families is purely financial, and tax savings certainly enhance what you can do financially to improve life for your family. However, how much money you leave for your heirs is not the only measure of your planning success. And, sometimes, leaving too much money, or leaving property in the wrong way, can do more harm than good. We had the privilege several years ago of meeting an heir to one of the great fortunes. He told us how he thought the vast wealth he inherited was wonderful when he was in his 20s. But, he admitted that, now in his 60s, it deprived him of the need and incentive to accomplish anything on his own. In the end, he thought that the way the vast wealth was left for him prevented him from achieving happiness and fulfillment. We walked away feeling relieved that our parents had not left us with his wealth. Warren Buffet puts it this way: Leave your children enough money so they can do anything, but not in a way so that they can do nothing. Common Planning Goals Each family places more or less emphasis on different goals, and brings unique needs and desires to the Estate Planning process. Still, there are some common goals almost all of them express:
- Keep control over our property;
- Maintain or enhance our lifestyle;
- Minimize the loss of value from taxes;
- Pass financial wealth to heirs in a beneficial way;
- Protect the inheritance we leave from creditors and ex-spouses of our heirs;
- Minimize family conflicts; and
- Pass important values to heirs.
A Few Tools to Meet Non-Tax Goals Sound Estate Planning includes a number of tools to further these goals, not all of which are tax-related. I cannot mention, much less explain, all of them in this short article. Yet, I do want to extend your holiday spirit with hints about a few of these tools. 1. Leave Property Protected in Trust. Most of our clients do not leave wealth directly to their children or grandchildren. Instead, they leave it in trust to protect it from creditors and ex-spouses, while giving each descendant “the keys” to his or her trust. This becomes an extension of the protections we all provided for our children when they were young. Well-drafted “spendthrift” clauses and other language help protect the inheritance you leave behind from exposure to those who may try to take it away from your heirs. Where desired, property can even be left so that the spouses who survive one of your descendants will have financial security, but not the ability to divert excess values to their future spouses or away from your descendants. You can provide far better protections for your heirs in this regard than they could ever draft for themselves. This is a very personal issue, and usually requires a careful dialogue between planner and client, followed by some good, custom, drafting. 2. Incentive Clauses. Many clients also use incentive clauses in their trusts to encourage beneficiaries to live a productive life, and prevent “affluenza” from creating any dependence which might be dysfunctional. These clauses limit distributions to a child unless the child meets standards set by their parents relating to completion of an education, working at a serious job or other actions deemed important by the child’s parent. Obviously, such clauses require careful discussion between planner and client to obtain just the right balance between incentives and an excess of control from the grave. 3. Use of Family Limited Partnerships or LLCs. When assets are to be left jointly for the benefit of multiple heirs, clients can either structure a family partnership or LLC to administer the assets, or provide rules in the trust regarding resolution of any disputes that might arise with regard to such assets. This needs to be balanced against potential adverse property tax consequences from the use of such entities. 4. Ethical Wills. Clients sometimes use language similar to an “Ethical Will” to pass values and encourage thrift or other virtues for their heirs. In that regard, many of our clients either let their children participate in the planning, or have us explain the planning to their children after documents have been signed. 5. Charitable Planning. Clients also use charitable strategies to pass and teach responsibility to younger generations. Charitable strategies work not only as a way to give something back to the society in which you built your wealth, but also can set a good example for your heirs and, to the extent you wish, provide a vehicle that compels your heirs to participate in giving as well. Charitable strategies can give heirs broad or narrow latitude in the actual grant process, depending on a client’s overall goals. With modern techniques, you can build a structure that encourages the younger generations to be involved in giving back to society without all of the expense and red tape of a private foundation. Charitable tools can bring these benefits even in Estate Plans that can only afford devoting a few tens of thousands of dollars to charity – this planning does not need to divert millions from the financial well-being of your heirs. 6. Customized Instructions for Successor Trustees. Initially, our clients serve as trustees (managers) of their revocable living trusts. But, at some point, either if the clients become incapacitated, or pass away, others will serve as successor Trustees. We spend a lot of time spelling out rules and guidelines for such successor Trustees, in order to better meet our clients’ goals. 7. Advanced strategies to deal with estates faced with potential estate taxes (the dreaded “death tax”). These strategies become relevant for estates above about $11 million, and need expert planning and implementation. “IF YOU FAIL TO PLAN WELL, PLAN TO FAIL” The real secret to a good Estate Plan is sound, thoughtful planning. To achieve your goals, find a planner who is willing to spend the time helping you understand the myriad options you have, who is willing to help you evaluate what options work for you, and who will take the time to customize an estate plan to meet your goals and desires for passing your wealth. And, while you are at it, if the government is not on the list of your chosen beneficiaries, find a planner who will help you disinherit the tax man. New laws have turned the estate planning world upside down from a tax perspective, and almost all apartment owners’ plans no longer optimize the balance between income, property tax and death tax consequences for their heirs. We get our greatest satisfactions from helping clients develop and articulate their planning goals, and then implement them in a tax efficient manner.
Kenneth Ziskin, an estate planning attorney, focuses on integrated estate, income, property tax and nontax planning for apartment owners. He has presented several seminars on Estate Planning for AOA members. He holds the coveted AV Preeminent peer reviewed rating for Ethical Standards and Legal Ability from Martindale-Hubbell. Ken offers free consultations for AOA members. He can be reached at 818-988-0949. View his website at ZiskinLaw.com. Ken will speak on Estate Planning Opportunities for Rental Property Owners at the upcoming Income Property Management Expo on March 25, 2015 at the Pasadena Convention Center. This article is general in nature and cannot be relied upon as advice for clients. Please get advice from counsel you retain for your own planning.