How often have you thought about updating your wealth transfer plan, perhaps due to changing family circumstances or in response to ever-changing tax legislation, only to put it off for another day – or year?
Estate planning is never a popular undertaking because it reminds us of our mortality, requires us to gather all types of records and the process is shrouded in inscrutable terminology.
The estate planning process is challenging, so it is not surprising to learn that surveys show fewer than half of Americans have basic wills; of those who do, many have documents that are out of date. The complexity of the process and the seemingly unending modifications of tax law make you wonder if there is ever a “right” time to prepare an estate plan. Despite reluctance to begin these conversations, it is imperative to engage in them because lack of planning could leave your family’s well-being or business interests in peril, or result in beneficiaries who are unprepared for the responsibilities of inheritance.
Regardless of the catalyst that leads to the estate planning process, the best starting place may be to consider our estate planning documents as a means of communication. Few of us think of wills and trusts in that way, but in reality, they likely will be our last communication with those we love. These documents also provide guidance to those who will care for our family members – our executors and trustees – when we no longer can do so ourselves. When you think about wealth transfer planning in this way, it changes the conversation from the traditional one that focuses primarily on taxes and rarely strays far from that subject.
Estate planning discussions ideally should begin around the dinner table with conversations about who you are as a family, common values and how financial wealth can further the family’s goals and philanthropic pursuits. This discussion will be enhanced by considering family wealth from a holistic standpoint. Charles Collier, author of the highly respected book Wealth in Families, states, “There is more to family wealth than the financial dimension. Human capital refers to who individual family members are and what they are called to do; intellectual capital refers to how family members learn, communicate and make joint decisions; socialcapital denotes how family members engage with society at large; and financial capital stands for the property of the family.”
“Taking stock of family wealth in all its forms helps a family lay a strong foundation for the well-being of individual family members and for the role that financial wealth will play in enhancing a family’s legacy,” notes Hugh Magill, Northern Trust’s chief fiduciary officer and global director of trust services.
Developing an “inventory” of family wealth doesn’t need to be an onerous undertaking, Magill adds. “Several years ago, we surveyed a group of 100 family business owners on family mission statements, and the results were striking: 16 had tried to prepare a mission statement but never completed it; 11 completed it and were pleased with the results; four tried but were not happy with the outcome; and 69 had never tried. This caused me to realize that, for many families, developing a formal mission statement was a daunting, and perhaps unnecessary, task.”
In contrast, defining a core group of values that reflect the unique and diverse set of a family’s human, social and intellectual capital may be a more enjoyable and rewarding undertaking. It is one that, ideally, should involve family members across several generations in a process that is in part historical and in other ways aspirational. Each family’s unique ancestry, relationships, hardships and accomplishments will provide lenses through which we can see who we are, both as a family and as individuals, and what values have shaped our experiences.
These values in turn lay a foundation for the decisions we must make in the estate planning process, and help answer common questions such as:
- How much financial wealth is sufficient for the family;
- What role will philanthropy play in the management of our “social” capital;
- How can we minimize the risk that financial wealth will have a corrosive effect on future generations;
- And ultimately, how can our wealth transfer plans lay the best foundation for the family’s fulfillment, individually and collectively?
Now is an ideal time to undertake this process. “The 2010 Tax Reform Act provides a remarkable window of opportunity for making lifetime gifts for future generations,” according to Chris Perry, a senior fiduciary officer with Northern Trust in Boston. For two years (2011 and 2012), the Act increases the gift, estate and generation-skipping tax exemptions to $5 million (adjusted for inflation to $5,120,000 in 2012) and reduces the maximum tax rates to 35%, the lowest rate since 1931. Prior to December 2010, when the Act was signed into law, “wealthy families faced much larger tax burdens due to lower exemptions and higher tax rates,” says Perry.
How long the window of opportunity remains open is uncertain.
As the law presently stands, on December 31, 2012, the gift and estate tax exemptions will drop back to $1 million and the tax rates will rise to 55%. With all tax laws, there is always the risk of a preemptive change. In November 2011, for example, Washington Congressman Jim McDermott introduced the “Sensible Estate Tax Act of 2011,” which if enacted would accelerate the 2013 changes to 2012.
Given this current legislative uncertainty, coupled with the opportunity to make large gifts under the 2010 Tax Relief Act, conveying values to future generations has taken on increased significance. Our values can be communicated through a simple statement of intent included in the terms of our wills and trusts. A statement of intent is a unique personal statement that is addressed to current and future family members and our fiduciary (see “Sample Statement of Intent,” above). It focuses on family values or a unique asset or circumstance of importance. It is intended to be an autobiographical and timeless “voice” for the future. This kind of statement isn’t something we can look to our estate planning attorney to prepare; we must do it ourselves.
Our wills and trusts usually are the last formal communication we make to our family. Consider how much richer these documents can be when they preserve our voice and convey wisdom to guide future generations toward lives of significance, enriched by the assets we have been fortunate to conserve and pass on for their benefit.