Estate Planning in Layman's Terms

Estate Planning is commonly thought of as only for the wealthy, the old, the private jet users. I'm here to tell you that it is important no matter what your age, income, net worth, marital status, etc. Estate planning is a broad term that includes many things like the creation of trusts, wills, letter of intent, healthcare power of attorney, guardianship designations, beneficiary designations, and so on. The technical definition is, "the arranging for the disposition and management of one's estate at death through the use of wills, trusts, insurance policies, and other devices"*. The definition does not include incapacitation which is also an important factor.

That's the boring stuff. I've always been a situational learner, so I will try to explain some situations that have a higher likelihood of hitting home with you. The first two situations are very simple. The last situation is much more complex but worth diving into. Note: Please excuse the depressing elements of these stories. They are meant to be short and sweet to drive the point home.

Situation 1:

• You are 65 years old and married to your high school sweetheart. You have three beautiful daughters who are now out in the world post college graduation. Two daughters find the loves of their lives and are married with children. Your youngest daughter marries, has two children of her own, but then sadly goes through a nasty divorce. As parents, you naturally have so much love for your daughter (obviously her children as well), but never necessarily had love for her now ex-husband. You always had a bad feeling about him.

Now let's think through your family tree for a second. Three kids of your own and all now have multiple kids themselves. When you and your wife pass what happens (assuming NO will is in place which is referred to as "dying intestate")? Are your grandkids going to inherit anything or will your daughters spend all of your money? Is your daughter who is now a single mother taken care of appropriately? Now you've essentially left your fate and your legacy in the hands of the court. A judge you have never met will decipher the law and decide who gets what. Now you're rolling in your grave because your daughter's ex-husband made a huge fuss and received his "fair share". Not good.

This probably could've all been avoided by having a will in place. It definitely could have been avoided with the proper trusts set up to ensure the money always stays in your bloodline and your grandkids would be taken care of.

Situation 2:

• You are a 50 year old widow. You meet a widower around your age and fall in love. You both have two kids of your own. Both of you agree it would be smart to develop wills that would take care of each other in the event of an unexpected passing. You both sign wills that leave all of your assets to the other. When the last partner dies the assets will be divided equally amongst all four children. You die at 75 years old. Your partner then signs a NEW will stating all of the assets (now including yours) will be left ONLY to his two children. More rolling in the grave.

What a nightmare. Not only did you lose your first love unexpectedly, but now you lost all of your assets you've worked so hard for. Your children are left with nothing now that you are gone. Is this situation fully avoidable? Absolutely.

Situation 3 (Skip if you're not interested in math):

• You are 49 years old and a very successful business owner who manufactures socks with catchy slogans on them. It was a family business started by your grandfather. You have now taken it to new heights you never imagined. You decide the market is great for a sale. You receive multiple offers to buy the business and ultimately sell for $30MM. Your net worth is now $40MM after paying that large tax bill. You are wealthy beyond your wildest dreams, but as a business owner, your arch nemesis has always been TAXES. You are happily married with three sons. For this example, say you and your spouse die 30 years later. Your combined estate at passing is worth $100MM roughly (150% growth from original net worth). With no trusts set up or gifting done your estate would owe a death tax of around $29.6MM to the government. Ouch. *Grandfather now rolling in grave*

Let's try to break down some math here and the power of gifting in this situation. The death tax seen above breaks down like this (using non-exact rounded numbers to keep it simple):

$100MM net worth - $26MM exemption at death of you and your spouse (assumes exemption remains unchanged) = ($74MM taxable estate X 40% estate tax) = $29.6MM owed at passing.

Now let's assume you set up trusts and gifted as much as you could when the business was sold. You and your wife gift the full allowable amount right away (roughly $26MM). That is now out of your estate and sheltered from the "death tax". Keep in mind this will also reduce your net worth starting point from $40MM to $14MM as these assets are no longer in your name. Now let's look at the math again:

$35MM net worth at death - $0 exemption left at death of you and your spouse = ($35MM taxable estate X 40% estate tax) = $14MM owed at passing.

This theoretical gifting strategy saved your kids $15.6MM in estate taxes. Not only will they save millions on the tax front, but they also will split up the original $26MM gift which is sheltered from tax and has grown for 30 years. Really powerful stuff.

To summarize - estate planning has many different facets. For me, it is all about protecting legacy. We are all doing what we believe will help us win. That "winning" could come from your career, your family, your passions, your money, etc. I am no different than anyone else when it comes to thinking of my mortality. I don't enjoy pondering it. What I enjoy even LESS is losing. The thought of losing everything the day my time is up is unbearable. Estate planning can help make sure that doesn't happen.

*merriam-webster.com/legal/estate%20planning

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.