It takes no planning to leave an inheritance, you just have to pass away owning something. However, most wealthy families are more interested in leaving a legacy, which does require significant thought and planning.

The Dilemma

John has worked his entire life to achieve success in both his personal and professional life. He wanted nothing more than to create the best life for his loved ones, and worked tirelessly building the family business to make sure it came to fruition.

As far as legacy planning decisions go, he kept pushing it off and procrastinating saying, “I’ll get to this one day.”

Now because of a recent diagnosis, he’s faced with his own mortality and no defined plan to preserve the family legacy. He’s working against the clock and facing the unanswered questions of:

• “Who is going to run the business?”
• “How do I divide this?”
• “How will taxes be handled when I pass?”
• “How do I make it fair for everyone?”
• “Will my wife be okay?”
• “How do I make sure I’m not removing my kids’ ambition and sense of purpose with a large inheritance?”

Family harmony is of paramount concern to most business owners, but proper legacy planning is necessary to preserve that harmony through the generations. Without thoughtful planning, the family business can be the very thing that pulls the family apart which is the exact opposite result of the business owners’ initial desire for building it.

How Creating a Plan Can Help

If the majority of a person’s monetary wealth is tied up into their business, the process of fairly distributing that wealth is not so simple. There are many ways that can cause confusion, conflict and stress when an estate is being forced to divide with no plan in place.

Without a predetermined plan to answer three primary questions: Where does my stuff go?, Who is in charge?, and What are the rules?, there is a greater potential to upheave family harmony and peace. Although these may seem oversimplified, the core of estate planning roots back to these basic questions.

When a wealthy individual takes the steps to create a structured and well-thought out strategy alongside experienced advisors, they have the power to make the decisions now and leave probable complications out of the question.

There are many like John that have one child working for him while the other two kids are paving their own path. There may be others facing unexpected life changes such as marriage or divorce, medical complications, lawsuits, and other factors that are creating roadblocks inhibiting a simple distribution of assets. These issues are common, and can be solved with an intentional plan.

As an example, John, who has one child in the business and the others doing their own things, properly structured life insurance could have been an option to provide liquidity for fair treatment to the “non-business” children while allowing his son to continue owning and running the business. That is, if he addressed this issue prior to his recent diagnosis. Now he is uninsurable, and is forced to consider less desirable, and potentially more complicated planning solutions.

Where To Start

Creating an estate plan is not limited solely to people lacking liquidity, but is increasingly important to have when one is less liquid. Taking stock of finances both in the past and future can help one decide which direction their estate plan should take. Depending on the individual’s circumstances a good place to start would be drawing up or reviewing core estate planning documents such as Last Will & Testament, Durable Power of Attorney, and Advance Health Care Directives, as well as updating life insurance ownership and beneficiaries.

For more sophisticated estate planning situations, the use of irrevocable trusts (either inter-vivos or testamentary) can be considered to combat potential transfer taxes. Estate plans and documents are not all one and done- it is recommended that a person continues to review these plans as often as life changes. The best practice of this would be every one to two years. Estate planning should be viewed as a journey, not a destination.

More On Liquidity Planning

High Net-Worth Individuals and wealthy families may experience less levels of liquidity for many reasons (aka closely held business interests, large real estate positions, etc.). When an individual passes with large amounts of wealth, transfer taxes are generally due nine months after death. The IRS also gives alternative ways of paying estate tax as well in certain special circumstances, such as making a Section 6166 election, effectively creating an installment note for estate tax liability. Any value held inside the estate over the exemption amount ($12,920,000 in 2023 per individual) will be subject to a 40% transfer tax. If liquidity is not available, these families may be forced to sell assets quickly to generate the cash necessary to make tax payments. When someone has to sell quickly due to illiquidity, their assets could be significantly diminished in value. Individuals know how much their investments and organizations are worth, and want to prevent a “fire sale” at all costs. A clear assessment of the situation is the key first step in estate planning. Whether the family wealth is made of business interests, investments, etc., it is critical to take stock of the size of the potential liquidity problem before determining your next step within estate planning.

In Conclusion

Granite Harbor provides a team of experts who can help wealthy individuals choose the best place to start within their goals and objectives. They will help you design a proper estate planning structure as an independent third party in a consultative manner. The team has a wheelhouse of techniques and strategies that can put an individual’s assets in the best place for their families and future generations.

The advisors are well aware that finances have the strength to enhance or erode family harmony, and are ready to help you identify and protect against potential enemies to that harmony.

If you would like to begin a discussion about how you and your family are answering those three key questions, Where does my stuff go, Who is in charge, and What are the rules?, feel free to schedule a complimentary 20-minute consultation with the team at Granite Harbor by clicking the link below.

This information is for general educational purposes only and is not intended to be legal advice. Consult with your attorney prior to implementing changes to your estate plan or wealth transfer strategy.