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Considerations in the Financial or Estate Planning Process
When preparing a comprehensive financial and estate plan, the most important considerations are: 1) how do I maintain financial security during my lifetime; 2) how do I structure an estate plan to meet legacy goals; and 3) if applicable, how do I provide for a smooth transition of a business asset.
Financial planning models
The term "financial planning" can encompass a wide variety of services and processes associated with the financial industry. In this section, we will focus on how financial planning can help individuals refine and recalibrate important considerations to help them meet their long-term financial goals which may include funding education expenses, building a retirement nest egg, wealth transfer to family members and gifts to philanthropic organizations.
While financial plans provide only hypothetical outcomes and cannot predict actual outcomes, they may offer information that encourages a reevaluation with respect to savings and/or investing for current and retirement expenses and adjustments to target retirement dates, wealth transfer goals and gifts to charity. A financial plan can also provide clarity around the need for life insurance, long-term care insurance, or the benefit of creating a short or long-term reliable sources of income in the future.
For clients who are considering whether to sell a business or investment real estate, a financial plan can provide an estimated projection for future receipt of sale proceeds, show the potential for a reduction in taxes due on sale, and model the long-term health of the remaining assets depending on how they are invested and future spending needs. The plan can help a business owner take into consideration, ahead of a potential sale, whether or not the net proceeds can support their continued level of spending. This may assist the seller in deciding if they can defer the sale until a future date when their spending needs are not as great or take measures to increase the value of the business.
As a compliment to an estate plan, a financial plan can show the potential benefits of funding a trust and how that trust may impact the client making the transfer as well as the beneficiaries. The plan can illustrate an individual's likelihood in meeting their own financial needs, reflect the impact of future estate taxes, model potential asset growth within the trust, and the probability of achieving wealth transfer goals for beneficiaries.
Estate planning
The foundation for any estate plan should begin with identifying the plan's objectives:
- Is the plan's creator planning to transfer wealth to family members, other individuals or to institutions and charities?
- What types of assets do they own? How are those assets titled?
- Are federal estate taxes an issue to be planned for? What about state estate or inheritance taxes and complications with probate?
- Are there any circumstances unique to achieving that client’s legacy that we need to take intoconsideration?
Some examples of objectives are the desire to maintain one's financial security during life (as well as for their spouse/partner), minimize estate and income taxes, provide for charity, maintain family harmony, provide for the future success of a family business; and promote a productive lifestyle for future generations.
Once established, the key objectives will provide the basis for any assessment of the current plan in relation to those goals and what, if any, changes might be considered in terms of documents and strategies needed to meet those objectives. At a minimum, an individual should consider having a Last Will and Testament, Financial Power of Attorney, Health Care Power of Attorney, and Advanced Healthcare Directives. These basic documents which also identify the individuals to be called into service upon death or disability (such as an executor, guardian, agent under a power of attorney or trustee) and re-titling assets consistent with those documents may be all that is needed for an individual's estate plan. However, depending upon an individual's net worth and other circumstances, a plan may be much more complex and can include additional planning strategies including entity formation, capital restructuring, and the lifetime transfer of assets to various individuals and/or trusts.
The effectiveness of an estate plan will not only be driven by the various planning objectives, but also by an individual's willingness to engage in various transactions and follow recommendations provided by their accountant and attorney. Plans are often broken down into phases which form a larger comprehensive strategy over time and rarely is an estate plan completed all at once.
Business transition planning
Some assets may require more planning than others. This is particularly true when the asset is an operating business, whether manufacturing widgets or managing real estate. Understanding the cash flows from the business, how long the client plans for those cash flows to continue, when and how the business will be transitioned, and what impact that will have on future cash flows are all important in providing sound planning advice.
Like the estate planning process, it is important to establish the objectives for the business as well as any facts and circumstances that may impact the ability to meet those objectives.
- Does the individual intend to exit from a business?
- Are there multiple owners?
- Are there key employees and are they owners?
- Is there a buy-sell agreement, or other governing operating documents in place?
- When will the transition event take place?
- Who would the business go to?
- Who should benefit from the proceeds?
- If employees are involved, are they able to purchase the business outright or through an ESOP? How does that transaction integrate with the estate plan?
- What obstacles might impede a smooth transition?
- What rules should be put in place for future operations/ownership?
General considerations for an effective plan
Understanding what advice is needed for a comprehensive plan and where to effectively get that advice is critical. Estate and gift taxes, individual income taxes, partnership and S corporation
taxes, individual state trust laws and asset protection laws, laws impacting planning for public benefits, laws impacting the ownership and operation of business entities, and ERISA and other employee benefit laws are examples of what may need to be considered in forming strategies for a complex situation.
While an attorney is essential in drafting legal documents, the team of advisors may include an accountant or other specialty tax advisor, insurance expert, valuation expert and a registered investment advisors . Additionally, where residential or commercial debt exists, it is a good idea to understand whether any asset transfers or other planning steps may violate loan covenants or impact credit facilities. In those instances, it is good to expand the team to include your commercial and personal banking advisors. Finally, where a business sale is being considered, it is prudent to engage with experts in the M&A (mergers and acquisitions) field to help maximize the business valuation.
There are a few last items that are essential to an effective plan. If you create a trust during life, fund it. Make sure that assets are titled in a manner consistent with the plan. This includes confirming the beneficiary designations for retirement assets and life insurance and updating them, if necessary. Be organized and keep a copy of all essential planning documents in a secure location where key people can find them. Include a balance sheet with account numbers and keep a record of digital assets and online passwords in a secured site. If there are tangible items of personal property that an individual wants to give to certain individuals, an updated list reflecting these wishes should be maintained. Keep a list of key individuals and their contact information, including any fiduciaries named in the documents, attorneys, accountants, and financial advisors. Finally, life happens, and it is important to periodically review the plan to make sure that it continues to meet relevant goals and objectives.