Elements of a Healthy Estate Plan

Published: Feb 21, 2022

The world is full of entrepreneurs who own and operate businesses to sustain their family’s lifestyles. They employ the bulk of the workforce and are the backbone of almost every economy around the world. But not all businesses will be retained and passed down to the next generations in a family, what we typically call a “Family Enterprise”. Statistics show that most family businesses will be sold off, to produce a liquidity pot to fund the owner’s lifestyle, retirement and inheritances for the lucky heirs. How can be incorporate elements of a healthy estate plan?

Estate planning plays a very important role in preparing for the transfer of an estate to heirs and charities.  It is also important to protect against contingencies (i.e. a serious illness).  Estate planning is a complex subject, as it takes into account all the various assets that are owned that may give rise to different tax and legal outcomes, how they are owned (in single name, joint name with right of survivorship or as tenants in common, in a corporation, trust, etc.), the location of the asset, fact patterns of the heirs (i.e. what citizenship or tax residence do they hold, are they financially responsible and literate, marital issues, health issues, etc.), how assets should be specifically allocated to beneficiaries, and whether assets can avoid probate & tax exposures by advance planning.

Estate planning has many advantages if well planned in advance, including tax deferral and minimization, family harmony, privacy, asset protection for minors and vulnerable beneficiaries and family philanthropy.

The most common elements in a well thought out estate plan may include:

  • Wills and the prudent choice of Executor and guardian of minors, and method of distribution (i.e. outright, scattered over years, or held in trust).  Multiple Wills may be needed.
  • Powers of Attorney for personal care and property (and the prudent choice of Attorney)
  • Trusts to hold assets on behalf of others (and the prudent choice of trustees)
  • Life Insurance to pay final taxes and legacies (and the choice of owner and beneficiary)
  • Pre-Nuptial agreements, post-nuptial agreements and cohabitation agreements to protect against relationship breakdowns
  • Cottage planning including a preferred ownership structure, co-ownership agreement, and cottage expense fund
  • Shareholders’ Agreements to deal with the orderly co-ownership of family corporations, to deal with death, disputes, retirement, divorce and disability
  • Philanthropy arrangements to create a role for family charitable giving and optimize the tax benefits

Tax considerations play a very critical role in any healthy estate plan, including:

  • Probate planning to avoid or minimize probate fees (some of the main tools include joint ownership of assets, alter ego or joint partner trusts, and bare trustee arrangements);
  • Income tax planning to minimize the impact of the “deemed disposition” arising at death (some of the main tools include an estate freeze or prescribed rate loan trust arrangement, and optimizing the use of the Lifetime Capital Gains Exemption); and
  • Inheritance/estate tax planning for situs assets held in jurisdictions where these taxes may apply (e.g. USA or UK), or where family members are subject to such taxes due to their passports or domicile.

Estate Planning is something that can be done transparently, sharing details with family members to get their understanding of what has been thought through to avoid misunderstandings down the road.  This is very highly recommended especially to include your beneficiaries and executors and trustees to be on the same page and in alignment with your intensions. And for more complex families, for example children from different marriages, the estate plan can ensure the privacy of separate inheritances using life insurance, multiple trusts and other ownership arrangements.

It is prudent to assemble a team of specialists to help develop a comprehensive estate plan.  It is quite common today for clients to engage an estate planner to create an estate plan roadmap.  Banks and law firms are a good place to start.  With the estate planning roadmap in hand, the primary execution role is typically played by an estate lawyer, tax accountant, insurance specialist, philanthropy expert, family facilitator, investment advisor, banker, and professional executor/attorney/trustee working as a team to handle the implementation. And it typically needs to be revisited over the client’s life as fact patterns change.  

In the FEA community, we call this a “Multi-Disciplinary Advisory Team” approach, where a team of competent specialists as needed works together effectively, on behalf of the family.

As death and taxes are a certainty, estate planning is a priority topic that needs to be given the attention it deserves, to ensure a healthy result.  A little time invested today can avoid substantial troubles in future.

Decision Tree: Review Elements of a Healthy Estate Plan

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