Death and taxes. Those are two of the unfailing truths of life. Inevitables. Putting in the time today to learn and plan is a smart idea as you can help future generations hold on to more of what you earned during your life while avoiding some of the potential taxes. For many starting down this path is daunting. There are twists and turns that one needs a trusted advisor to help navigate. With this advisor the starting point is working on an estate plan. In short, the concept of estate planning is the technique that those who accumulate wealth during their lives use try to deal with the conundrum of who to leave money to and in what manner while avoiding paying unnecessary taxes.
There are more millionaires in the United States than any other country. Estimates gauge the number to be approximately 22 million in 2023. (estimates are 62 million globally) That means approximately 8.8% of Americans are millionaires and the average age of a millionaire is 57. 42% of millionaires are baby boomers and about 19% are millennials. This age poses a problem for many as average life expectancy is 79 years and somehow between becoming a millionaire and the first of the inevitables, we need to figure what to do to avoid the second inevitable.
You see in the US there is a death tax. The death tax refers to paying an estate tax on the assets of a deceased individual. As the derisive nickname might indicate, a lot of people aren’t fans of death taxes. From SmartAsset.com:
“The estate tax was first imposed in the 1700s on and off to help fund various wars, but after World War I, it became a permanent fixture,” says Joshua Zimmelman, president of Westwood Tax & Consulting in New York. “Some people argue that there is no purpose and it’s an unfair tax, but it has persisted for years.”
The federal death tax doesn't apply to all as it doesn't kick in until you have a net worth of 12.92 million (or if properly planned for 25.83 for married couples) in 2023. The twist is the 'properly planned for' notion and for many, there is an additional STATE LEVEL death tax. The states of CT, HI, IL, MA, MD, MN, NY, OR, RI, VT WA impose a tax on your assets that is in addition to the federal tax. OR and MA start the tax at 1 million and Illinois is at 4 million. This means if you are unfortunate enough to die while being a resident of one of those wonderful states you may owe tax to the state as well as the federal government. But there are ways to mitigate some of these taxes (moving to the Sunshine state works) including working on a sound estate plan.
The cornerstone of an estate plan is a Revocable Living Trust. At the most basic level, a revocable living trust, also known simply as a revocable trust, is a written document that determines how your assets will be handled after you die. Assets can include real estate, valuable possessions, investments and bank accounts.
As with all living trusts, you create it during your lifetime. (There are also testamentary trusts, which don’t take effect until after you die.) Assets you place in the trust are then transferred to your designated beneficiaries upon your death. What sets a revocable living trust apart is that you can change or cancel the provisions at any time. Hence, the term “revocable” is in its name.
Taxes are not the only reason to establish a living trust. Its really about establishing a set of rules for your wealth. In a living trust you document how your money is to be allocated and used in the three stages of your life: alive and well, alive and incapacitated and after your death. Unlike a Will alone, a living trust helps avoid the probate process (the trust outlines what is to happen to the money once you are gone), reduces the chance of disputes (same reason) and keeps your documents and your information private. (a will is part of the public record that anyone may access, and probate is the government supervising your assets after your death).
So why is the title of this article "When trying to be thoughtful destroys the family..."? Well simply put when you establish a living trust you make provisions for who will oversee the rules that you have established for your assets after you are gone. And just like in life, sometimes people can disappoint you. The person that oversees your trust is called the 'trustee'. During your life you are generally the trustee of your own trust, your spouse may be named after you. But what happens next is where families have been disrupted and torn apart. We have all heard of the super wealthy family where the child is 'ticked' they didn't get dads Ferrari or seen the Netflix on the kids that killed their parents to get the family money.
Unfortunately, the problems that are associated with family money do not only affect the uber wealthy.
Intra-family conflicts arise from a myriad of situations and money can often act as proverbial gasoline on long time smoldering coals. I think it's incredibly prudent to think through and be honest about your family. Then while establishing your estate plan think about how your family may fair, how each family member will handle sudden newfound wealth. You do not have to 'reach out' from the grave to control your family but there are techniques that can help you and with true proper planning, and perhaps some outside guidance, you can leave a lasting legacy that doesn't 'destroy the family'.
The following are excerpts from an article from Wealth Advisors Trust Company that talks of the need for all trust participants to understand their roles and be versed in what your wishes are. For the more complex situations, a child with special needs, an addiction problem or just peace of mind, the addition of a non-partial outside 'third party' as trustee may make sense. Read on for their insights. And as always, should you have any questions please reach out to us at Quantum Private Wealth.
Here’s what’s happening. When wealthy individuals establish trusts, they often appoint friends or family members to serve as trustees for another family member to oversee investment management, distributions and trust administration after the generators of the wealth pass on. But these friends or siblings who accept this role often don’t realize that they have a fiduciary responsibility to always act in the best interests of beneficiaries. It’s complicated. When they don’t understand these duties, they often fail as fiduciaries. How? By favoring certain family members, benefiting from quid-pro-quo arrangements, not overseeing the investments properly or paying themselves excessive fees from trust assets. Beneficiaries often take their relatives or friends to court when these lapses occur. Think this is a rare occurrence? It isn’t. In fact, (we -sic) can provide a list of more than 40 legal cases where beneficiaries sued family trustees and/or financial advisors for fiduciary lapses and excessive family trustee fees. Large and small trusts are included in these examples. And, in every single case, beneficiaries claimed that a family trustee had violated their fiduciary responsibility. So, what can you do to prevent these lawsuits from occurring? Step 1: Make Sure The Trustee Understand Their Fiduciary Responsibilities First off, it’s critical to educate anyone who wants to become a family trustee of their fiduciary responsibilities.
Trustees must act in the best interests of all beneficiaries. This duty includes managing trust assets prudently (or choosing an investment adviser to prudently manage trust assets), distributing assets in accordance with trust provisions, avoiding conflicts of interest, keep accurate records for all decisions and communicating effectively with beneficiaries.
Trustee fees must be reasonable. There are well-known industry standards that outline appropriate fee ranges for different activities depending on the size and complexity of the trust. One “unreasonable” example is when family trustees outsource investment decisions but still charge the same fees as a traditional trust company that manages investments in-house.
Trustees must be committed to full disclosure. They should clearly and transparently communicate to beneficiaries the specific services they provide to prove their fees are necessary and appropriate.
Trustees must respond to beneficiaries’ concerns. They need to be prepared to respond when beneficiaries challenge their fees or how they handle their fiduciary duties. And they must keep accurate records, (aka document, document, document) just as corporate trustees must do.
Trustees should be willing to seek professional guidance. Trust administration can be complex and challenging, and trustees should get the advice and guidance they need from attorneys, accountants, trust administrators and financial advisors to ensure that they are fulfilling their fiduciary duties.
Beneficiaries should understand these responsibilities as well. Step 2: Empower All Stakeholders with the Knowledge They Need to Keep Trustees Accountable The more both trustees and beneficiaries understand the details of their family trust, the less likely that lawsuits will occur. While establishing the trusts one should take the initiative to encourage all stakeholders to educate themselves on the following issues.
Go over the provisions of the trust document with both trustees and beneficiaries. In addition to specifying when and how distributions should be made, the trust document should also outline if there are to be trustee fees and how trustees are compensated. Meet with trustees and beneficiaries to review the document to ensure that everyone knows what the trustee’s fees should be and what they’re doing to earn them.
Spell out actions that could constitute fiduciary breaches. Both trustees and beneficiaries should be aware of actions such as self-dealing, favoritism or discretionary distributions that constitute violation of their state’s trust laws.
Educate beneficiaries on what you expect of them. This is the hardest and perhaps the most important. Let your beneficiaries know what your wishes are. You don't want them to get tattoos...tell them. Don't want them to stop working? Tell them. NO drugs, tell them. The trustee is tasked with following your wishes, but the beneficiaries should know your rules. Education now may serve to alleviate future disputes.
Of course, one way these potential conflicts and lawsuits can be avoided altogether is to suggest that all stakeholders agree to appoint an experienced corporate trustee to administer the trust either as sole or co-trustee. As a sole trustee, a corporate trustee can ensure that every aspect of trust administration, from the investment management to the distribution requests the trustee reviews and fulfills, is carried out in a prudent, transparent, and cost-efficient manner. And as a co-trustee, a trust company can ensure that family co-trustees are always acting in the best interests of all beneficiaries and, if applicable, are paid appropriately for the services they provide. Special thanks to Christopher Holtby at Wealth Advisors Trust and with input from Smartasset.com
Information contained herein does not involve the rendering of personalized investment advice but is limited to the dissemination of general information.
A professional adviser should be consulted before implementing any of the strategies or options presented.