Your Money Matters: Wealth succession - an estate of mind

There is a simple, yet poignant expression, "You can't take it with you." And so, as more and more families have been forced to tackle the issue of wealth distribution to future generations and recipients, the need for a clear strategy has increased.

There is a simple, yet quite poignant expression, "You can't take it with you." And so, as more and more families have been forced to tackle the issue of wealth distribution to future generations and recipients, the need for a clear strategy has increased. This strategy, or estate plan, is no longer reserved for the ultra-wealthy; families of modest-to-high net worth also have realized that a well thought out estate plan is the best way to deal with inheritance issues for all concerned.

What is the purpose of an estate plan? It is to ensure that the owners of an estate have their wishes fulfilled to pass on their assets as they see fit. Creating a plan compels the owners of an estate to define their wishes for the distribution of their assets upon death. In addition, once the wishes are defined, there is a need to determine what legal instruments are appropriate to ensure the fulfillment of those wishes.

What are some of the considerations that wealthy families need to address? I would say that tax and liquidity issues would be major considerations. Of course, on the personal level, who gets what and how is of equal importance. Most families need to consider how they will transfer their businesses to the next generation, how to divide other assets among family members and friends, and funding for charity.

Parents with minors have the additional burden of designating custodians in the event of the untimely demise of both parents. I use the word "burden" because this matter, though not economic in nature, involves a difficult process of envisioning someone else raising the parents' offspring and deciding who is best suitable. Also important is the assigning an executor of the estate. This individual is responsible for carrying out the wishes of the will and dealing with any outstanding liabilities to the estate.

So, now that we have the broad picture, what next? The will is generally the central document to any estate plan. It is a legal document defining the beneficiaries and benefactors, possessions and ways in which the estate assets are to be distributed, custodians for minors and the executor of the estate. It is the instrument for implementation of the benefactor's wishes

Is there a need for more than a will? I believe so. Trusts are a good example. For many years, offshore trusts were used as a tax shelter for wealthy individuals, especially for offshore financial investments. The Israeli Committee effectively eliminated the tax benefit of offshore trusts. The trend has now become using trusts for what they were originally intended - as a legal structure designed to further protect the wishes of the grantors/benefactors from legal challenges to the will, by heirs or potential heirs, and to take assets out of the estate that might otherwise be exposed to future legal liabilities.

Here's an example: a husband passes away, and the will states that everything goes to his wife and, upon her death, the assets be divided equally among their children. Meanwhile, the wife remarries and years later divorces. Her second husband sues for half the estate and may very well win the court case. Alternatively, the original husband and wife agree to establish a trust and transfer assets into the trust. They are known as the grantors. These assets are earmarked for their children when both of them are gone. As long as either one is alive, the trust will provide income and limited access to assets to the surviving spouse. Upon death of the second spouse, the trust will be responsible for carry out the grantors' (parents') wishes regarding the beneficiaries. In the event that the husband predeceases his wife and she remarries, the second husband would find that the trust would be an impenetrable legal barrier to his ex-wife's assets. Offshore trusts have the added consideration that they are outside the legal jurisdiction of the Israeli courts.

What other options are there instead of trusts? There is no real replacement for a trust. In some cases, certain types of offshore insurance policies may offer a cheaper, simpler and more tax efficient alternative to a trust while allowing greater control of offshore financial assets while the benefactors are still alive.

What about ownership transfer of a family's company, or shares in a partnership, to the next generation or the surviving spouse? One has to consider several things. Let's first talk about one spouse predeceasing the other where there is an intangible business asset involved. Furthermore, let's say that this business is a partnership. Unless the surviving spouse has been the expertise and familiarity with the operation, it is generally desirable to created a legal agreement accompanied by a mechanism to generate liquidity, which enables and requires the remaining partners to buy out the shares of the deceased partner from his/her surviving spouse and compels the surviving spouse to sell them. This ensures the company's continued viability and creates a satisfactory exit for the surviving spouse. Essentially, it is a win-win situation.

What about a closely held family business? How does one pass the company on to the kids? Good question. First, it is critical for the parents to be certain that their children really want to inherit the business and run it; this is not as simple as it may seem. Sometimes the children may have no desire to run the company after Mom & Pop are gone, but out of respect, or for other reasons, are afraid to tell them. It is important to clarify all the issues regarding the potential heirs to the company in order to allow for the parents to make critical estate planning decisions while they are alive (it's rather hard from the grave!). For example, they may decide to sell the company while they are alive in order to generate liquid assets that they can pass on to the next generation.

What about charitable giving? Many wealthy individuals make charitable contributions while they are alive and decide to dedicate a portion of their estate to charity upon death. A family may want to establish charitable foundation while the senior members are still alive. There may be an immediate tax benefit with the proper structuring. This, of course, will make sense only if significant sums are involved.

Any parting words of wisdom? I would like to quote Hodding Carter who said, "There are only two lasting bequests we can hope to give our children. One of these roots, the other wings." The author is Global Investment Strategist at Tandem Capital.