Control from beyond the grave. It's an interesting thought. As a successful executive, you have invested time, stress, heartache and pride in your work and are fortunate enough to have the assets to enjoy the fruit of this labor. Not only is this wonderful for you and your spouse, but if managed properly can also be for your heirs or philanthropic endeavors of your desire.
Effective preparation can ensure that your legacy is managed according to your wishes in the event of your passing, making this difficult time less stressful for your intended beneficiaries. The more complex your estate, the more you need to be aware of the various regulations surrounding each portion of your estate — and do not assume this will be taken care of automatically or through a simple Will.
Your personal and familial circumstances will change throughout your career and into retirement, so it is worth re-visiting your estate plan with each major life event, change of circumstances or change in laws if you want your beneficiaries provided for in the manner you expect.
Know who your beneficiaries are
You may have your Will up to date, but there are other accounts and benefits you should revise periodically to ensure that the beneficiaries listed are current. It is common for cases to be litigated following divorces, re-marriages, births or other changes in circumstance when the listed beneficiaries have not been updated. Without proper documentation, a federal or state court may determine beneficiaries — and this may be different from your intentions. Trust me, it is never fun to see a life policy or large 401k asset go to an ex-spouse when it should have gone to the current.
Also always remember this fact: Don't simply count on your Will because beneficiary designations will supersede your Will directives.
Know how your company stock holdings will pass to heirs
Most stock option and equity compensation accounts do not have any type of beneficiary on the account, and may be vested in the event of death, with the stock option being taxed on the deceased person's final tax return.
It is vital to review the terms of your company's plan, as many companies have exceptions to their current vesting and exercisability rules. For example, a company may state that in the eventuality of an employee death, the stock option must be exercised by a legal representative or beneficiary before a set amount of time, or even before the expiration date of the stock option.
Evaluate the need for controlling your wealth after death
Depending on which state you live in and the value of your estate, you could consider setting up a trust to control your wealth after death. Some states have simplified the costly and time-consuming process of probate for estates below a certain size, so it is worth knowing the limits where you live, and where they fall in relation to your estate.
If your estate is over the state's limit for the simplified probate process the creation of a trust is one way to control the distribution of your wealth. There is also an option to create a "living trust", whereby your assets are transferred to the trust when you are still alive, with either you or a nominated person or entity as the trustee. The advantages of a living trust is that assets not in your name can avoid the process of probate.
Consider both federal and state estate tax implications
As well as the federal government's estate tax, many states also impose their own estate tax or inheritance tax. The structure and the size of your estate will have varying tax implications. The federal limit for passing wealth to a non-spouse without incurring tax in 2017 is $5,490,000, but if your estate is over this threshold you will need to be aware of the tax implications of your arrangements.
It is worth noting that the value of your "gross estate" may be very different to that of your "taxable estate", that is, the total value of your estate following various allowable deductions: charitable contributions, certain property left to the surviving spouse and state inheritance or estate taxes are all considered eligible for subtraction.
State taxes vary considerably, with some states aligning more closely with federal estate taxes (for example, if an estate is exempt from federal taxes then it will also be exempt from state taxes), and some operating independently or imposing both. Connecticut, for example, currently maintains a $2,000,000 exemption which is non-transportable to a spouse (vs. the federal exemption at $5.49mm and is transportable). It is important to be aware of both the federal limits and the state tax implications when planning for your estate.
Each estate is different, so don't just rely on generic advice for your own unique circumstances. By working with skilled advisors who understand your assets and your needs you have the opportunity to increase your control while also potentially reducing estate tax liability. Laws and regulations frequently change, so continue to revisit your arrangements periodically to ensure that you are still receiving the best provision for your beneficiaries.
If you would like to discuss how executive estate planning can benefit your family, simply head over here to request a time to speak privately with a member of our firm.
Until next time...
— Tim Golas, Partner