The Power of Trusts

Mention trusts and most people automatically think of support for surviving spouses and education funding for children.  Good things to be sure, but a thoughtfully designed trust can do much more!  It can help ensure that money left for heirs will be constructively used…according to your wishes. 

Are your children mature?  All too often the answer is ‘not yet.’  One solution is to authorize your trustee to distribute income in its discretion and to couple that with principal distributions over a certain period of time…say ten or fifteen years.  This approach allows children to learn (and recover) from mistakes and gain sufficient maturity to handle larger sums at a future date. 

Are your children financially responsible?  Some adult children are destined to have debt and other financial issues throughout their lives.  Fortunately, spendthrift clauses can be put in place in order to protect them against creditors and wayward spouses.  A similar approach can be taken when substance abuse issues are present. 

Are there home ownership, charitable giving, or other important priorities?  Whether one or more of these apply to your situation, your trust can be crafted in a way to provide specific direction and guidance about when and why funds can be used. 

Is your child interested in mission or other types of humanitarian work?   Some adult children are strongly committed to these callings but find it challenging to adequately self-support.  Financial and family circumstances permitting, a well-written trust can be an excellent source of supplemental income.  

Are your children too well off for their own good?  Some parents fear that a looming inheritance may be a disincentive for children to become productive, responsible members of society.  Enter the incentive trust!  These are designed to permit distributions only when a beneficiary attains a certain income threshold.  Naturally, language can be included that makes exceptions for bona fide illness and disability. 

Is your child entrepreneurial?  If so, you can earmark money and authorize your trustee to make distributions to start a business once certain conditions or parameters are met.  

As you can see, a trust is a powerful, flexible estate-planning tool.  When well written, your trustee can act as a surrogate financial parent, thus able to care for your loved ones much as you might if still around. 

By conferring with a trust specialist and legal advisor, your wishes and objectives can be incorporated into your trust document.


What Is Your Game Plan?

If you are a business owner you have spent years accumulating knowledge about your market and how to tailor your business model to that ever changing demand.  It is certainly a consuming feat.

For years, as a small business owner, I am sure your goal was maintaining positive cash flow and a stable balance sheet.  Retirement probably seems like a distant speck on the horizon, maybe it hasn’t even been considered.  However, establishing a sound business succession plan is beneficial for most business owners and can be absolutely necessary for some.  Is it for you?  When will it be time to sell?

We’ve all heard timing is everything, but often we become victims of time.  In fact, I would imagine one of the hardest aspects of owning a business is determining when the time is right…to get out.  Kin to selling any asset you are always better off selling at a high point of demand.

Have a game plan in place so you aren’t forced to execute a fire sale because you neglected to have a sound succession plan in place.

Here are some simple tips from a Madison area attorney on Business Succession Planning:

  •  Start Early – This allows you time to train successors and evaluate them, there is always the possibility things don’t work out as planned.  The goal in starting early is to obtain a gradual transition without notice.
  •  Define goals and objectives – This includes all goals including retirement and financial planning.  Goals for family and beneficiaries should be taken into consideration as well as other interested parties such as co-owners and key employees.
  •  Get input from outside advisors – By gathering input from outside advisors one gains objectivity, experience, and expertise including but not limited to legal, taxation, valuation and financial planning.
  • Identify desired successors – Whether it is a family member, key employee(s), or an investor group; identify the individual(s) who will be most likely to succeed.  Unless you are one of the few that will have the luxury of a cash buyout, it is important that your business continues to succeed after you relinquish management and ownership of the business.

One other thing I would like to make note of; I recently attended a seminar hosted by the Madison Estate Council and the speaker that evening touched on an all too often overlooked aspect of Succession Planning when it comes in the form of Family Business; and that is the emotional aspect of the transfer. 

The speaker, Shipra Seefeldt, the owner of Strategic Solutions Consulting; stressed conflicting values – “…values of the family are often in conflict with values of the business.  It is always important to consider the emotional transfers of wealth as well as the physical transfers of wealth.”

Family businesses add an additional challenge to the succession plan and as a business owner in the Dane County area, you have some excellent resources at your fingertips to build your multidisciplinary team including;

  •  Attorneys,
  • Financial Planners,
  • CPAs,
  • Family Business Consultants, etc.

 Tapping into some of these resources will help you tremendously during the development stage of your business succession plan.

Let us know if we can help guide you through the process.

Estate Planning Is Not a Dead Issue

People often equate estate planning with a trip to their favorite dentist:  something to be delayed as long as possible.  In truth, estate planning is one of the most important planning exercises undertaken by an individual or couple. 

To understand why, let’s define estate planning and discuss its primary objectives. 

What exactly is estate planning?   It is the process of planning for the care, management, and disposition of your assets upon death and when you are no longer able to manage your own affairs.  Contrary to popular understanding, estate planning has profound implications during lifetime! 

The National Network of Estate Planning Attorneys defines estate planning this way: 

I want to control my property while I’m alive and well, care for myself and my loved ones if I become disabled, and be able to give what I have to whom I want, when I want, and if I can, I want to save every last tax dollar, attorney fee, and court cost possible. 

So…estate planning is a very personal process about accomplishing your goals during your life and beyond. 

What are the primary objectives of good estate planning?  Different people have different objectives;  however, it’s possible to identify several common themes.  Here they are: 

Objective #1:  Care for Loved Ones.   

Contrary to popular belief, people don’t plan primarily to care for assets;  rather, they plan in order to ensure that they, their loved ones, and/or other entities are properly cared for.  Planning is a means of providing families and advisors with crystal clear instructions about what is important and how to care for things in the event of disability or death.  

Objective #2:  Pass On Your Legacy. 

Estate planning is more than a matter of dollars and cents.  It provides an opportunity to promote and support your values and beliefs about such things as religion, marriage, education, work, and drugs and alcohol.  

Objective #3:  Avoid Probate and Intestacy 

There are two types of probate:  1) death probate and 2) living probate.  

Death probate is a legal proceeding to verify and administer a decedent’s will.  More specifically, it’s a court-supervised process that oversees the transfer of a decedent’s property to other individuals after paying last expenses, taxes, and satisfying creditors, if any. 

Living probate is a court proceeding commonly known as a guardianship or conservatorship.   It occurs when a person becomes legally unable to manage his or her own affairs.  

Intestacy occurs when you don’t have a plan for yourself.  Your state of residence has a plan for you…one that is based upon that state’s so-called intestacy laws.  

Objective #4:  Tax Minimization 

Tax minimization is an importance objective both in life planning and post-death planning.  With regard to life planning, the focus is on minimizing income and gift taxes.  Regarding post-death planning, the focus is minimizing the federal estate tax as well as state inheritance taxes, if applicable.  

Objective #5:  Plan for Disability 

Most of us are likely to experience a long-term disability prior to death.  Thus, it makes sense to execute certain fundamental estate planning tools such as a funded revocable living trust, financial power of attorney, and health care power of attorney.  It may be worthwhile to supplement these tools with disability and long-term care insurances. 

Objective #6:  Peace of Mind 

Estate planning is an opportunity to exercise greater control over one’s life…and legacy…by making careful, thoughtful decisions in advance…before becoming disabled and before death.  

Knowing that one’s life and post-death estates are in order results in what is perhaps the best benefit of all:  peace of mind. 

If you don’t have an estate plan in place, schedule an appointment with an attorney who specializes in this area.  If you have, there’s never been a better time to review it.

Living Probate and You

Mention probate and most people automatically think of the court-supervised process of transferring property upon someone’s death.  Unfortunately, there’s another type of probate, known as living probate, that needs to be planned for and…avoided! 

Let’s take a few minutes to explore the fundamentals.

What is living probate?  Living probate is a court proceeding commonly known as a guardianship or conservatorship.   It occurs when a person becomes legally unable to manage his or her own affairs.  

How does it work?  As a general rule, a family member initiates the proceedings by formally petitioning the court, claiming that a parent or loved one is no longer competent and requesting the appointment of a guardian and conservator.  The court receives testimony and other evidence, often in a public forum, and makes a determination.  Typically, a conservator manages assets and handles financial matters while a guardian handles personal matters.  

What are the disadvantages of living probate?  Here are several: 

  • Living probate is public which often means that anyone can attend court and examine personal records.  This can be a significant source of embarrassment for the subject of the hearing and the family as a whole. 
  • Living probate is emotionally painful and difficult.  As noted above, a family member usually initiates a guardianship proceeding.  That, in and of itself, can be extremely difficult for the initiator;  moreover, it can lead to considerable resentment and conflict within the family. 
  • Living probate is expensive, since it’s a court procedure.  It should be noted that annual reports to the court are required, thus often necessitating accountant’s fees and so forth. 
  • Living probate is often frustrating and time consuming.  Although a conservator may have broad discretion in managing the ward’s assets, it may be necessary to secure court approval for certain actions or when dealing with other family members who strongly disagree and threaten litigation.  
  • Living probate can be very uncertain.  As a general rule, the court, after hearing considerable testimony and in its infinite wisdom, generally selects the family member it believes best suited to the task.  Unfortunately, that individual may be the LAST person on your list.  In other words, you will have zero control in determining who cares for you.  

How can one plan to avoid living probate?  Very simply, an individual can significantly reduce the odds of living probate by preparing a comprehensive estate plan.  It should contain the following documents: 

  • A funded revocable living trust:  This document normally defines what constitutes disability and allows your physician and a trusted family member to make that determination in private…without court intervention.  That same document identifies your ‘disability trustee’ who becomes responsible for managing your property.  If your property is in trust and managed by your disability trustee, there is no longer any need for a court proceeding.  
  • Financial power of attorney:  This individual is authorized by you to manage property held outside of your living trust (i.e. 401(k) account, IRA, annuities, etc.) or…to transfer property to the trust on your behalf when appropriate. 
  • Health care power of attorney:  Through this document you select and appoint a trusted individual to make medical decisions on your behalf when you are no longer able to do so. 

Disability and long-term-care insurances can and should be an important part of your ‘disability plan’.  In effect, they augment your planning documents and help ensure a more comfortable environment in the event of your disability. 

Remember…estate planning is an opportunity for you to take better control of your life by making important decisions in advance of any disability.  Take a few minutes to chat with your estate-planning attorney in order to ensure that your personal disability plan is adequate.

Choose the Right Trustee!

When establishing a trust, selecting the right trustee is critical.  Some estate planning documents name an individual to serve in that capacity.  All too often, it’s not the right choice. 

Typically, this person is a family member who works full time and has no experience in trust administration, investment management, taxes, conflict resolution, or other fiduciary matters.  The appointment often creates discord within a family, and the newly-minted trustee soon discovers that a burden, rather than an honor, has been conferred upon him or her. 

So…the creator of the trust might want to consider naming a professional trustee such as a bank or trust company.  Here are a few reasons why: 

Impartiality/Objectivity:  A corporate trustee is a neutral party, therefore not vulnerable to the tugs of emotion and family dynamics.  The end results are better decisions and improved family harmony. 

Expertise:  A corporate trustee is an organization that employs professionals with broad experience and deep knowledge, including but not limited to investment management expertise and a thorough understanding of legal and regulatory requirements. 

Continuity:  A trust may need to exist for many years;  however, individual trustees  age, become ill, die, or move away.  These factors may prevent an individual from properly executing his or her fiduciary duties and responsibilities.  A corporate trustee is more permanent;  therefore, it offers stability and uniformity of service…from one generation to another.  

Team Approach:  Modern trust departments typically employee several trust officers and other support staff.  If your family’s trust officer is ill, on vacation, or out of the office for any other reason, a team of qualified professionals is still available to assist with any need. 

Cost:  Contrary to popular belief, it is generally far more cost effective to use a corporate trustee.  Remember, an individual trustee typically hires multiple professionals to handle investment management, tax preparation, legal advice, and so forth.  The end result is often…much greater expense. 

Think of the trustee choice as a wise and loving decision for your family.  What’s the right choice for your family?

How Much Money Can You Afford to Lose? WRONG QUESTION!!!!

Last week, I met a delightful individual who was understandably distressed by her broker’s remark that she could “afford to lose” a particular sum of money.  In certain respects, it’s predictable that an advisor might make such a remark…many are taught to do so.  In addition, investors often ask themselves, “How much can I afford to lose?” 

However…it’s the WRONG question!  The RIGHT question is this:  How much wealth must I preserve/have in order to reasonably ensure my desired lifestyle and…peace of mind?  

This is the question you must ask yourself…and…it’s the one your advisor must help you work through.  Only after answering this question can someone decide how much money he or she is willing to commit to additional risk. 

Times are tougher than most want to admit!  The global economy is increasingly flirting with recession.  If recession or significantly slower growth become reality, it will be more challenging to obtain desired returns.  Volatility with a downward bias will become more likely than less likely. 

So…how much wealth must I preserve in order to reasonably ensure my desired lifestyle and peace of mind? 

Any other question…is out of the question!    

Estate Planning…for LIFE!

Is your estate plan in order?  Pose that question, and most people answer ‘yes’ or ‘no’ in the context of whether they reviewed (possibly amended) their will or revocable living trust in recent years. 

As Billy Mays might have said, “But wait…there’s more!” 

The ‘more’ part is the lifetime component of the estate planning process.  So…carefully think about the following questions:

  • Will I have enough income to enjoy my retirement?
  • How will a sudden disability affect my income, my cash flow?
  • If I become disabled for the long-term and require the services of a health care professional on a daily basis, how will I pay for it?  Where will I live?  Who will pay?  For how long?
  • Given the current economic and political environment, is my overall investment plan sensible for me and my family? 
  • Have I done everything possible to be tax-smart?
  • Who will manage my finances should I become disabled?  Am I still comfortable with that decision?
  • Who will make important health care decisions on my behalf should I become unable to do so?  Am I still comfortable with that decision? 

Do you have answers to all of these questions?  Are you comfortable with them?   If not, take a few minutes to speak with your wealth manager or estate planning attorney. 

The National Network of Estate planning attorney defines estate planning as follows:  

“I want to control my property while I am alive and well, care for myself and my loved ones if I become disabled, and be able to give what I have to whom I want, the way I want, when I want, and, if I can, I want to save every last tax dollar, attorney fee, and court cost possible.” 

Sounds like a good plan…for LIFE!