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By Jules Haas, Esq.
Successful business professionals are adept at effectively
and efficiently managing their businesses. Yet, when it comes to applying
their successful business principles to their own financial well-being,
successful results are not always achieved. This is particularly true
when it comes to estate and lifetime financial planning.
A business, in its purest form, is an amalgamation
of individuals who work toward the achievement of shared goals. In many
ways, the personal financial well-being of these individuals—management
and workers alike—is often inextricably tied and sometimes essential
to the long-term success of a business. For example, how does a business
continue to function when its principal dies? What member or members
of the owner’s family are entitled to receive the deceased owner’s
interest in the business? Who will assume the management positions suddenly
vacated? Is there a last will? Are there estate or other taxes and expenses
that must be paid? Are there liquidity issues?
Similar issues face the workers at the company. For
example: have company employees created an effective personal estate
plan that is coordinated with and takes into account benefits that a
company may pay at the time of the employee’s death? Will the death
of a key employee’s spouse affect his or her ability to perform or even
stay on the job, especially if that person’s financial well-being has
been dramatically changed due to the demise of a spouse who lacked an
appropriate estate plan or will?
As with all business decisions, the best method to
achieve proper estate and lifetime planning is to understand the essential
elements:
-
Wills—“Do I need a will?” is
a frequently asked question. If one does not have a will, one’s
property that is in one’s name alone will go to persons designated
by law. Such beneficiaries may not be the people to whom one wanted
to leave property. The law will also determine who is going to administer
one’s estate, if a person has not been named as executor or trustee
in a will. Formulating an estate plan also allows one to consider
the use of will substitutes, such as lifetime trusts, that may be
useful in particular circumstances.
The law of wills is controlled by the laws of each state. The state
that controls or provides the interpretation of a will is the state
where an individual is domiciled, which is where a person’s primary
home is, including where that person votes and files taxes. If one
has more than one residence, one must decide which of those residences
should be a domicile.
- Property—Decide which property is going to be controlled
by a will and which property will be excluded. Property that is held
in joint names (e.g., most commonly, bank accounts, brokerage accounts
and real estate) is usually not controlled by a will. Upon the death
of one party, the jointly held property passes, by “operation of
law,” to the other joint owner.
- Trusts—The above principle also applies to the “in
trust for” accounts that are often established at banks. Such accounts
pass directly to the named beneficiary upon the death of the account
owner and are usually not controlled by a Will.
- Other Assets—Assets that are generally not controlled
by a will include life insurance, IRAs, retirement funds, annuities
and other assets where there is a specified named beneficiary. Sometimes
the terms of a pension plan or annuity contract will determine the beneficiary,
unless otherwise provided. Such property will pass directly to the named
or designated beneficiaries (if they are alive) and will not be controlled
by a will.
Difficult Issues
- It is easy to imagine the problems presented by the nature of property
ownership. For example, if a person prepares a will that says all of
that person’s property goes to a nephew, but at the same time,
all of that person’s bank accounts are held jointly with a niece,
when that person dies, all the bank accounts will go automatically to
the niece, and the nephew will get nothing from those accounts.
- In a business, owners and/or employees may have various pension plans,
profit-sharing plans, insurance and other benefits that are paid upon
death. If a person’s estate plan fails to account for and coordinate
such benefits properly, the results can be detrimental for the intended
beneficiaries and the impact of taxes could prove more onerous than
they need to be.
- Intended beneficiaries named in a will may be shut out of their inheritance
if the business benefits are paid directly to different named beneficiaries.
Similarly, tax planning or trusts that were incorporated into the will
provisions may be ineffective if there is no property to fund these
vehicles.
- Shareholder agreements, life insurance and other business and corporate
transfer vehicles are essential to prevent a business from being paralyzed
after the death of key owners or employees.
First Steps in Formulating an Estate Plan
- List assets and review one’s financial status. Remember to be
very careful to check whether assets are owned in one’s name alone
or are payable to another person either as a joint owner or as a named
beneficiary.
- Determine to whom one’s property is to pass. Think in levels,
since the beneficiary that a person names to receive property may, in
fact, die first. So, if one wants nephew Joe to receive one’s estate,
one must consider an alternate for the property in the event that Joe
pre-deceases.
- Choose an Executor or Trustee as well as substitute Executors or
Trustees, if the first nominee is unable to act.
- Another issue that must be considered is that of estate and gift
taxes. Even though the ceilings for the imposition of these have risen
dramatically (i.e., the first $1,000,000. is exempt in 2003), the necessity
for basic planning remains paramount.
If one wants one’s business to run smoothly, even in
the event of a principal’s or a key employee’s death, it is essential
that every contingency be anticipated and prepared for in the appropriate
estate documents.
Author Bio: Jules Haas, Esq. is an attorney
specializing in estate and business planning, Surrogate’s Court proceedings
and guardianship proceedings for individuals and businesses. He is based
in Manhattan and can be reached at jules.haas@verizon.net
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