Founders make great clients—they have vision, understand risk and reward and are good at making decisions. Why is it then that many don't understand the importance of having an estate plan? Maybe it is time to reframe the objective into terms they understand. What if you told your client that a great estate plan is like a business plan for their life (and death)? Just as a business plan is a road map to long-term success, an estate plan is a road map to achieving peace of mind. There’s no escape from death and taxes, so we might as well help our clients plan for both.
Why is an Estate Plan Necessary?
An estate plan is more than just a document that disposes of assets at death. A great plan provides guidance and protection during life as well. For example, a financial power of attorney allows the client to choose someone he trusts to handle his financial affairs when incapacitated. If you’re the investment advisor and the client is incapable of making decisions, who will bear the responsibility of doing so? Who will give you the approval you need to act on urgent investment matters? A financial power of attorney can provide answers during this critical time.
An estate plan also allows the client to transfer assets in a tax efficient manner that best suits his family. If a client dies without a will detailing disposition of assets or appointing a guardian for his children, the law will make those determinations for his family. Understanding this reality may provide the motivation your client needs to complete the most important business plan of his life—the plan for his death. It's never too early or too late for a client to work on his plan. Several young billionaires have been featured in the news regarding planning they’ve implemented even before they’ve had children or, in some cases, even before they’ve been married.
Gathering Data and Implementing the Plan
A great estate plan, like a great business plan, will provide a road map to success. In order to develop a plan, a client and his advisors should have an understanding of the client's current personal and financial situations. Although each plan is unique, there are several basic documents that should be included in almost all plans: (1) a financial power of attorney detailing who should handle financial affairs if the client is unable to do so; (2) a health care power of attorney detailing who should handle medical decisions if the client is unable to do so; (3) a health care directive or living will setting forth the client's wishes regarding life sustaining procedures if he is terminally ill; (4) a will detailing how assets should be distributed and who should be guardians of minor children; and (5) beneficiary designation forms for life insurance and retirement plans. Now that your client understands the importance of planning, it’s time to bring all the elements together into a working plan. Your objective is to help the client develop, review and execute basic estate planning documents.
Planning for Business Assets
As an advisor, you understand the planning opportunities associated with a start-up, a liquidity event and agreements among business partners. These are all great planning opportunities. Some of the most effective gift planning can be done during start-up stages. An easy but effective strategy is for your client to put stock in a trust for children early on, since it’s much better for stock to appreciate in trust, rather than transfer value to children after the stock has appreciated. If the client has charitable objectives, you can help him understand the advantages of giving to charity before a liquidity event. The client won't pay tax on the appreciation and more funds will end up with the client's charity of choice.
Review, Revise and Update the Plan
Just as your client must periodically review, revise and update his business plan, his estate plan must also be periodically examined. Life events that might warrant a review of your client's estate plan include marriage, children, divorce, career changes, major liquidity events and relocations, to name just a few.
A great estate plan can serve as a business plan for your client's life. As an advisor, it's your job to help the client understand that the time spent planning now can provide peace of mind for family, aid in the transition of business interests while protecting both family and business partners and, perhaps, even provide more money to those the client loves and the charities the he supports, all while paying less in taxes.
Lorri Anne Dunsmore is a partner in the Seattle office of Perkins Coie LLP. Lorri has over 27 years of experience representing individuals, businesses and tax-exempt organizations in a variety of charitable, wealth transfer, business succession and federal tax matters.