Clients often express a desire to leave their estate to their children in equal shares. But when the estate includes a family business, that might not work.

For example, consider a situation where the father, Frank, has spent the last several decades creating and building a family business. Now as Frank ponders retirement, he wants to leave the business to his three children, Amy, Brian, and Colleen.

Amy is intensely interested in the business and has been working in it for the last several years. She knows the systems, processes, products, and clients. In fact, as Frank wanted to step back, Amy picked up the slack. She is ready to go immediately, so that the business keeps making money.

Brian is totally uninterested. He is an outdoorsman at heart, and hates the idea of being behind a desk of any kind.

Colleen has the aptitude for the business, but has a consulting job that has her working long hours. She is often out of town at client locations, and does not have the time to put into the family business.

Dividing everything equally would be unfair and impractical. Amy would be putting in all of the work for only a third of the profit. That is a recipe for disputes among the three children. It also may create other problems that arise in operating a business with absentee owners, from morale problems to governance issues. Worse yet, it would be possible for Brian and Colleen to out-vote Amy in any significant business decisions, even though they do not have any experience with the business or its operations, employees, culture, or products.

In other words, this is a case where an equal division would be unfair to Amy – and potentially also harmful to the business itself and to its employees.

Instead, Frank might think about other allocations of assets. One possible way is to designate the business to Amy and other assets for Brian and Colleen. A different strategy may be for Frank to purchase life insurance for benefit of Brian and Colleen to give them reasonably equivalent value. And there may be other possible solutions.

Estate planning fortunately allows a lot of flexibility to tailor a solution, and to avoid the kinds of situations that can impose stress on both the business and the family. If a small business is in the family, it pays to make sure that it will not fall apart because of – or due to – an unsuitable allocation among beneficiaries or a succession plan that does not consider the interests, pursuits, or strengths of those that will be involved.

One of the inevitable questions that comes up in estate planning is who to designate as the executor of your will.

It should be:
– Someone you trust,
– Someone who is organized, and
– Someone who is diplomatic.

Why?

Nominating someone you trust is a clear necessity. An executor will be responsible for collecting information about the assets you own and the liabilities you owe, paying off any debts and taxes, and then eventually distributing the estate according to the terms of the will. You must have confidence in whoever is entrusted with such information and duties.

Gathering the assets and liabilities requires some organization, particularly as statements from creditors and accounts owed roll in. Creditors may include utility service providers, open credit card accounts, home loans and mortgages, car loans, consumer installment contracts, medical service providers, subscriptions, clubs and societies that you belong to, insurance, and on and on. Assets may include bank and brokerage accounts, retirement accounts, insurance policies, real estate, personal property, and more. There potentially can be a lot to get organized, and someone who will approach it systematically is likely to be a strong choice.

Finally, the larger the family, the greater the number of people who have a potential interest. That can also increase the potential for a dispute, whether based on emotions or family history or perceived unfairness. Having a diplomatic executor who can deal with such issues — particularly at a time when emotions can run high — may be best able to keep the family on track and focused on moving forward together, and to diffuse any tensions that build up.

When Shannon and Joe executed their Estate Plan, they were delighted to have a plan that reflects their true wishes, and even covers a variety of “what if” scenarios.

“Now we have that out of the way,” they thought.

Only a few years later, some things in Shannon and Joe’s life began to change. They became proud grandparents, then decided to move to be closer to them. Joe started talking about selling his business earlier than he originally thought he would. And they began talking about how to help fund college for the grandkids.

These are not rare and unheard of circumstances, but they can impact the estate plans. And other unplanned, less fortunate circumstances can arise too.

So how do you deal with the unplanned in estate planning?

1) Replace “One and Done” with Estate Planning that can change with you.

Some things you can see coming and some things you can’t. After all, life has its ups and downs. That’s why the best approach to estate planning is not to have a “one and done” mindset.

Instead, we emphasize revisiting the Estate Plan every so often ,including for each phase of life and each major life event. We don’t want to think about your life’s work being a single conversation or document that you sign and gradually forget about. We want it to be something that grows with you, changes with you, and reflects where you are now as well as where you’re trying to go.

2) Build a plan to address many “what if” scenarios

When you build your estate plan to take certain “what ifs” into account, you can better recalibrate where necessary, such as appointing different agents or reconfiguring the beneficiaries of certain things.

There are also major life events that should be taken in account. Weddings. Births. Job changes. Perhaps divorce. Eventually death. How will these kinds of events impact what you have or want in the estate plan? It’s possible that such an event leads you to change certain allocations, or to add or subtract provisions to take care of certain family members. In addition, there may be insurance or retirement accounts may need to be updated.

So rather than view the structure of your plan as permanent, look at it as a foundation you are continually building upon, re-shaping the structure where necessary.

3) Assume there will be law and technology changes

Over time, the law changes. For example, changes to the estate tax from time to time have changed certain estate planning priorities, and have led to different planning opportunities. Also, the enactment of HIPAA increased the healthcare-related documentation often included in plans.

We’ve also seen technology changes, such as the increase in online transactions through email, financial accounts, and even online photography through Instagram, Facebook, etc. It’s now important for an agent or executor to be able to access these kinds of digital accounts. That wasn’t an issue years ago. However, as technologies evolve, things change — and as they do, certain provisions in your estate plan may need to be updated.

Life isn’t a simple plan – make sure your estate plan can keep up.

If you don’t review an estate plan periodically, you’re taking a chance that you outgrow it. This creates a potential situation where you have documentation that doesn’t reflect your present set of circumstances.

Instead, with an estate plan that’s regularly updated, you can rest easier knowing that for all of life’s changes, you’ve done everything you can to account for where you are today, and what your wishes are for tomorrow.

John and Jessica are ready for a long and happy life together as they’re getting married in a few months. They’ve even decided to sit down with an estate planning attorney to talk about the long haul and putting some paperwork in place that expresses their wishes.

Just as they head off to their appointment with the attorney, Jessica turns to John and says, “You know, should we really talk to someone about this right now? After all, we’re going through a big change. Let’s just do this a few months after we get settled. Then we’ll have a plan that matches where we are.”

John agrees. A few months later won’t hurt anything. Of course, a few months stretches into a few years. That’s when John asks his spouse, “Hey, I think we should talk to our attorney about a will.” Jessica responds, “I’m all for it. But look, we’ve got a lot of big changes coming up – what with the baby arriving in six months and then we’re planning on moving into a bigger place. Let’s just wait until things settle down. Then we can have a plan that syncs up with our life at that point in time.”

But when is life ever truly “settled”? It seems like there always will be an impending life change happening. The instinct in people like John and Jessica is to wait until the change occurs so they can address estate planning to match their circumstances, but by the time they get past one event, another change will be on the horizon.

How to Break the Cycle of Fear and Make Estate Planning Real

A common fear of doing estate planning is that if you put plans in place today, those plans will be set in stone or inconsistent with your needs in no time. Instead, remember that life isn’t static and change is going to happen. This is not a reason to choose to do nothing at all.

In fact, it’s when you know there’s a change coming up that you have an incentive to create or update your estate plan accordingly. But a significant life event does not always change the structure of your estate plan, and does not necessarily mean having to start from scratch just to account for the update.

If you carry the assumption that you can’t take action right now, however, that attitude may result in you never taking any kind of action.

Plan. Pivot. Repeat.

At Windy City Legal, we see clients who are going through changes great and small. The big changes can consist of events like a marriage, birth of a child, divorce, or the recent sale of a family business. There’s no doubt that these can change the picture of your estate plan. But remember that we can pivot the plan to face such change when we need to. Change, regardless of the degree of it, is not a reason to hold off on estate planning. Nor is it a reason to hold off on updating as you go.

So rather than pressing the pause button and waiting for some mythical point in time when life “settles down,” seize the moment to tackle estate planning with us now.

Cindy thought about estate planning for a long time, but when she was finally ready to make an appointment with an estate planning attorney to talk about it, she read that the estate tax at the federal estate tax threshold was over $11 million, and the Illinois estate tax started at the $4 million level.

“What am I worrying about,” she thought. “I’m not anywhere near that level! So my estate isn’t subject to an estate tax anyway. That’s for wealthy people to deal with.”

Not long after, Cindy got in a car accident where she was severely disabled. Her family members were distraught and jumped in to try to act on her behalf. Unfortunately, that’s where the problems began. Though her family all wanted what was best for her, they could not agree on what that entailed. Since Cindy hadn’t done any estate planning, nobody knew her true wishes on healthcare for herself, and she hadn’t designated anyone to act on her behalf. Consequently, dealing with doctors, hospitals, and insurance was a struggle.

Estate planning is for everyone who want to invest in continuity and stability for themselves and their family.

Let’s take a closer look at some of the reasons why estate planning is important, regardless of income level or net worth.

• Healthcare Planning
In the example of Cindy and her family, an estate plan can include healthcare planning. In the event of a disability or incapacity, somebody can step in and act based on instructions that are already written out. That way, the choices that you would make for yourself and take the actions that you would want taken can be implemented by the person designated to step in and help. Estate planning can also give designated people access to medical records so that doctors and hospitals can communicate with them. Some examples of healthcare planning documents that can be implemented include the healthcare power of attorney, living will, HIPAA authorization, and other advance directives.

• Guardianship
If you pass away or are incapacitated, who is going to take care of your children if they’re under the age of 18 or have special needs and can’t be left alone? Estate planning can help you nominate the individual you would like to see designated as guardian for your children. It also helps you think through who best would match your values, the needs of the child, and how care would be funded. Other considerations may include whether the potential guardian is good with children, responsible with money, and has a stable home and work life. Making a careful selection among those qualified and willing to act can minimize the impact of the change on the child.

In contrast, failing to address the question of who to appoint would not make the question go away should the need arise. Instead, there is a chance that your family will be involved in a heated dispute over who should be the guardian of your children – and this is a period of time when the children are going to need as much stability as they can get. Prolonged court activity is not what will bring stability quickly. Or perhaps no qualified family member or friend of the family emerges, and the court appoints someone with no prior relationship to the child or the family. That’s usually a less desirable outcome than making a decision as far as who in the family is qualified and willing to take on that role.

• Avoiding Probate
Probate is a process by which a decedent’s affairs are settled, debts are paid and property is distributed. It can take a significant period of time, and it is a public kind of proceeding. Estate planning offers opportunities to implement trusts and other structures that may reduce or eliminate the need to go through probate. Without estate planning, probate should be expected for people who own any real estate, or who have assets of $100,000 or more. That figure applies to everything, including cars, bank and brokerage accounts that are held in your name, any art, jewelry, or collections, household objects and furnishings, and more. With a lifetime of working and accumulating assets, it doesn’t take long to reach this threshold.

Stability. Continuity. A strong family. These aren’t things that should be reserved for the very wealthy. Every person deserves it and estate planning is a key tool to deliver it from one generation to the next. So whether you’re just starting out or have a high level of assets, Windy City Legal can help you customize a plan that addresses your needs, and identify any areas that need to be re-aligned. By having a discussion of what you have and what can be put into place, Windy City Legal can show you why estate planning is an outstanding investment in yourself and your family.

A group of friends decided to meet up after work the other day. The conversation turned to their families and how much their kids had grown in such a short time.

Joe commented that he and his wife had just done some estate planning. Tom shrugged. “My wife will get everything anyway, so why bother?”

But Tom was both incorrect and shortsighted.

As a father, his wife would only be entitled to half of his estate. Without an estate plan that specifically articulates his intentions, his estate would be governed by the Illinois Probate Act. The default provision under the Act would provide half of his estate to his children, not the whole of the estate to his wife.

Would that arrangement provide enough for her? What would happen to the house? Are the children over 18 and able to care for themselves, or are they still minors? What other problems will manifest themselves?

In addition to those potential problems, what if Tom’s wife were to pass away before Tom? If something were to happen to him too, his lack of action would expose his heirs to the time and costs of a probate court proceeding to settle Tom’s estate, and to potentially avoidable costs and delays.

If his kids are not yet 18, their fate becomes uncertain. Who becomes their guardian, and who will ensure their welfare?
Tom can address these and other potential problems by following Joe’s path and creating an estate plan. And if he does not, Tom’s kids may wish that he had.

Ultimately, estate planning is an investment in stability and continuity. It can be tailored to the needs of the individual and his family, and can be updated over time as goals change. But it remains a foundation that supports the needs of the family, even when the person who first created it is no longer around.

A living trust is an arrangement that is set up by the grantor – the person giving assets to a trust for the benefit of the trust beneficiaries. The trust sets out the terms and conditions of how those assets are going to be held.

In a sense, a trust is like a box. At the time it is created, it is empty. It will only come to hold what is placed inside of it. Thus, after the trust is created, it must be funded with the assets it is meant to hold and govern. Trust benefits will only apply to the trust assets. If no assets are transferred into the trust, the structure of the trust may remain in place, but only as an empty container – and any intended benefits of the trust will not materialize.

Funding a trust means transferring assets into the trust. For example, real estate is transferred by recording a deed that names the trust as the owner. For bank and brokerage accounts, the accounts themselves may need to be retitled so that the ownership of the accounts are properly reflected with the financial institution. Transfer of various kinds of personal property may be reflected through documents that memorialize the transfer, together with any filings required by law or any pre-existing contractual arrangements.

What are the advantages?

One advantage is that trust assets do not go through probate when the grantor passes away. Instead, the trust will continue to own them. The trust may provide that the property is distributed to beneficiaries, or it may provide that the property is to be held in the trust and, for example, the income used for a beneficiary’s health, education, or welfare. The administration of trust assets also enjoys greater privacy. When property goes through probate, it is a matter of public record, which potentially may be reviewed by third parties. A trust avoids that, as the trustee is responsible for administration of trust assets.

What is a trustee?

The trustee is the person who administers the trust, who makes sure that the provisions in that trust agreement get followed, and who maintains and manages the property that the trust holds. In a living trust, the grantor may also be the first trustee during his life. Successor trustees are named to serve after the initial trustee is either no longer alive, no longer wants to serve, or is no longer able to serve.

What, then, is the effect of the transfer?

When property is transferred into trust, legal title passes from the individual to the trust. That does not necessarily mean that the individual becomes unable to use that property, however. Use of the trust property depends on the terms of the trust, but a living (or inter-vivos) trust generally provides that the trustee may use the trust property, enjoy it during his lifetime, and perhaps even sell, gift, or transfer it. (In contrast, some irrevocable trusts are structured to limit such uses.)

The risk of not funding the trust

Although it is possible to have a trust agreement in place without funding it, the intended benefits of such a trust may go unrealized. The assets of the person will remain titled to him individually, but will therefore remain subject to probate, as well as to personal liabilities which may accrue. The trust would be able to receive assets in the future, but will remain as an empty vessel until actually funded.