In 2010, George Steinbrenner the owner of the New York Yankees, avoided paying $500,000,000 in taxes. The best part about this story is that his estate plan saved him these taxes, not a tax planning strategy.
The Steinbrenner family had a simple strategy. Create a tailored plan for their family and have a team that could help them execute.
Estate planning for business owners can be complicated and confusing. We are going to simply it today.
In this blog, we are going to cover 1 of the 5 areas every business owner should have covered. Today's topic is the 6 key components of every estate plan.
Interested in the other 4 areas check out the complete guide to business owners.
What is an Estate Plan?
Your estate plan is simple. It should accomplish 3 primary goals.
Give direction to your assets in advance.
Give direction for how to take care of yourself and your loved ones.
Save money on estate taxes.
Everything we do in life is amplified when emotions are heightened. Unfortunately, death is undefeated and when that time comes emotions will be higher than normal. I want you to think about your estate plan like a contingency plan in your business. The idea of a contingency plan is to ensure the train stays on the tracks if things go haywire. Your estate plan is your contingency plan for the assets you own and the people that you love.
The great thing is that these 6 tools can save you and your family all kinds of headaches.
Let's dive in.
Estate Planning for Business Owners
1) Revocable Living Trust
Your trust is going to be the most important tool in your toolbox. First, what goes into a trust? Think about this as anything with a physical title. Examples of this are brokerage accounts, homes, and cars. Assets with a title are meant to go in your trust.
This is important for two primary reasons.
To Avoid the Probate Process
To Give Direction to Assets
The Probate Process:
First what is the probate process and why do we want to avoid it? Probate is the government's plan to distribute your assets for you. This process has many downsides. Let's just name a few.
It is a public process
Anyone can come make a claim to your assets
A judge gets to decide where assets go
It is costly, 5% of your assets typically
You don't want this plan.
The nice thing is that with a properly set up trust all this can be avoided.
You are probably thinking to yourself how do I know if my assets are going to through this probate process? If you answer no to both of these questions your assets are likely at risk.
Have I had an attorney draft a trust for my assets?
Have I titled all of my assets into that trust?
Don't wait until it is too late. Take action with your team to get a trust set up.
Direction to Your Assets:
Our second primary reason is to give direction to assets. Unlike a beneficiary on a brokerage account, a trust can always have a backup. Let's look at an example of a brokerage account with a trust vs a brokerage account without a trust.
Without A Trust:
This is a simple setup. Let's assume this is an individual account with your spouse as the beneficiary.
If you pass away these assets will go to your spouse directly.
If your spouse isn't alive to take your assets they go to probate.
Pretty simple. Now let's look at why a trust can be better.
With A Trust:
When you set up a trust you can give specific examples beyond simply a beneficiary. Let's look at a few common examples we see in conjunction with a trust.
These assets must stay in the trust and be used for health, education, maintenance, and support.
These assets must stay in my bloodline.
These assets will go directly to my children. If they are not living they will be split between my living heirs.
In a trust, you can get specific. This can be good both for planning and for avoiding probate.
After all, you have worked your whole life to have the assets on your balance sheet. Don't you want them to go where you decide?
2) Pour Over Will
Now you know what happens to your property with a title let's talk about all the other stuff. These are all the items you own but don't have a title for.
Mom's wedding ring
Dad's famous paintings
The priceless family heirloom
The most common arguments that happen when distributing assets of an estate can be avoided with a pour-over will.
So how does this pour-over will work?
It all starts with the first part of the estate plan. The trust. Without the trust, we are going to go back to the probate process where a judge will settle the estate.
A pour-over will is going to pour or move all of your assets without a title into your trust. This will accomplish two main goals.
It will allow you to decide who gets these assets in advance.
It will allow you to avoid the probate process.
These assets can have both monetary and sentimental value. A pour-over will is the best way to protect the value you see in these assets.
3) Healthcare Decisions
Our goal with estate planning is to leave nothing up to chance. This includes your health care. You have heard that without your health you have nothing. A health care directive is the best tool to allow you to control your path in the health care system.
When healthcare decisions are being prepared there are two documents that we want to focus on.
Healthcare Directive - Outline your wishes for end of life treatment
Healthcare Power of Attorney - Who can speak to healthcare providers on your behalf
When drafting these 2 documents there are 3 main goals.
Who gets to make decisions for you?
When they can make decisions for you?
How healthcare decisions are made for you?
The Who
This is exactly as it sounds. You are able to name who you want to make health care decisions for you.
In this directive, you are able to name multiple individuals. That way if someone is unable to serve or unwilling to serve in this capacity at the time of an event you always have a backup.
The When
This is a two-pronged answer.
Power of Attorney
A power of attorney can be springing or durable.
Springing Power of Attorney - Will spring into action if you become incapacitated.
Durable Power of Attorney - Will be effective immediately when you sign the POA.
Healthcare Directive
This document is where you are able to outline end of life decisions.
What type of treatment do you want as well as treatment you do not want?
Do you want life support? - You Decide
Do you want to be resuscitated? - You Decide
Do you want to be kept alive at all costs? - You Decide
I imagine you would want to make these choices for yourself.
Outside of this being helpful for you it is also helpful for your loved ones. No one wants to put a spouse, friend, or family member in a position where they have to decide whether or not to pull the plug.
4) Financial Power of Attorney
Similar to a health care power of attorney a financial power of attorney allows you to state in advance who gets to make financial decisions for you.
When setting up a financial power of attorney it is important to understand there are two different types.
Springing Power of Attorney - Your authority springs into action when an event occurs.
Durable Power of Attorney - Your authority is effective immediately.
The setup of these documents has serious implications. Often times we see families perplexed when I outline to them that their Power of Attorney is durable. They had no idea the individual could call their bank today and request a withdrawal.
5) Guardianship
I have three kids and I want to make sure they are protected if something happens to my wife and I. Proper planning involves guardianship planning for children. A well-designed estate plan will dictate who, when, and how a guardian will be able to watch over your children.
Within guardianship, there are a few components to consider.
How can that guardian use your money?
How does your child access money as a minor?
What schools would you like your child to attend?
It amazes me how many people care deeply for their kids, but haven't taken a few hours to get guardianship taken care of.
6) Estate Taxes
Every decision you make in your financial life will have a tax consequence. Even your estate plan can have a tax consequence. The good news, if you are worth less than $13,610,000 in 2024 you are not subject to estate taxes. If you aren't sure what your net worth is let's look at a few components you should consider.
Bank and Investment Accounts
Death Benefit of Life Insurance
Value of your Business
Retirement Accounts
Real Estate Assets
If you add up all of these items and it is under $13,610,000 then you will avoid this tax.
If you are over this amount you will be subject to estate taxes. Now is the fun part. Every dollar over $13,610,000 will get taxed at almost 40%. Thankfully there are steps and solutions to avoid these taxes.
The next move is to assess who owns your assets.
Are they in your individual name?
Are they in your trust name?
Are they joint assets?
Once you have determined this you will better understand your next steps. Each person in America receives this $13,610,000 which means marriage will get you a 2x on this number.
The next step is to look at what types of assets you own.
Are they liquid or illiquid assets?
Are any assets likely to appreciate dramatically?
Do you have enough liquid assets to pay your tax bill?
After you have gone through this exercise you will have a good understanding of what to do next. The biggest issues arise when you have a large amount of your net worth in illiquid assets with little cash to pay your tax bill.
At Moment, many of our clients are navigating impending estate taxes. There is incredible nuance in planning done for families navigating estate taxes. To take your learning a step further, learn how gifting can be a powerful strategy to consider. If you are concerned about your potential estate tax bill, consider scheduling a call to see how we can help.
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Remember, estate planning doesn't need to be scary. There are simple steps you can take today. Our job is to help guide you on your path to success.
If you are a business owner who is interested in a free review of your estate plan, schedule a call and talk with a Moment founder.
Get in Touch With An Advisor
Frequently Asked Questions
Here are some answers to questions I received frequently about this topic.
Are you a fiduciary? Moment Private Wealth serves clients as a fiduciary 100% of the time.
How does Moment Private Wealth make money? We are only paid in one transparent way, by our clients. We receive no kickbacks or participate in any profit-sharing arrangements. Our fees are simple, transparent, and clear for our clients.
How are you different than other financial advisors? We are specialists in working with professional athletes and business owners. We limit the number of new clients we take on. This allows us to provide unparalleled value and highly personalized service to professional athletes and business owners. We work as a team to service our clients. We believe in building a team of “A” players. This ensures our clients receive world-class tax, estate, insurance, and investment strategies. We focus on educating first, then executing.
Where do you hold my investments and how can I see them? Moment Private Wealth uses Fidelity Investments as a third-party custodian for our client investment accounts. As a third-party custodian, Fidelity safeguards and provides reporting to you and the IRS each year. Clients can also access all financial information via the Moment Private Wealth Client Portal.
How do you work with other members of my team? We believe in the power of the team. For most of our clients, their team consists of Moment Private Wealth, an accountant, an attorney, a banker, and an insurance specialist. We help our clients build out their team of individuals or work with existing partners clients have. Our goal is to ensure every family has a team of experts to protect their interests.
How do you choose investments for clients? As independent financial advisors, we can gather research and make recommendations based on all available options. We determine clients’ portfolios in partnership with some of the largest asset managers in the world. Each quarter, we have calls with teams of CFAs (Chartered Financial Analysts) to ensure our clients are receiving the most up-to-date strategies and recommendations.
What does your average client look like? Our clients are nearly all athletes and business owners. Our average client has a net worth greater than $5M. The strategies, solutions, and planning that we implement have a high-net-worth and ultra-high-net-worth client in mind.
Does Moment Private Wealth help you pay less in taxes? Taxes are going to be your largest lifetime expense. Our goal is to help you pay the least amount possible and never leave the IRS a tip. Our team of specialists understands this and works to reduce your taxes today and in the future.
Can Moment Private Wealth help business owners with succession planning? Yes, this is part of creating a roadmap for your goals. Having first-hand knowledge of selling a business will allow you confidence throughout the process. Many business owners get one chance to sell a business. Having a firm that can help is key.
Why should I consider hiring Moment Private Wealth? Great question! But first, let us explain why you shouldn’t hire us. If you’re looking for an advisor who will pitch shiny object investments or be a “yes man” you are in the wrong place. Why? Because we believe in being truth tellers and only giving advice that we take ourselves. The investments, strategies, and planning we do are all things our advisors do with their own money. If you are an athlete or business owner interested in things like lowering your tax bill, investing smarter, and finding a trusted partner we might be a good fit.
*Moment Private Wealth offers information on tax and estate planning that is general in nature. Tax and Legal advice are not provided by Moment Private Wealth. Consult an attorney or tax professional regarding your specific legal or tax situation.
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