Even if you never thought of yourself as especially wealthy, there may be a fair chance that you fall into the category of "high net worth individuals"—those who have liquid assets of $1 million or more.1 For many individuals who hope to leave a legacy for their loved ones, estate planning can be important. Here are three estate planning reminders every high-net-worth individual should keep in mind.
Create a Will and Keep it Current
In America, 68% of adults do not have a will. This group includes those with no net worth and those with substantial assets.2 Someone with few assets who dies intestate (without a will) creates a hassle for their loved ones who must go through the legal process of court probate. Someone with significant assets who dies without a will creates not only those hassles, but also may reduce the inheritance they intend for their heirs, and sometimes might set up heirs for long and expensive legal battles.
Without a will, you have no control over how your estate will be managed and distributed. Instead, assets will flow to your heirs based on your state's laws of intestate succession. Even a simple will may help you execute your wishes and help your loved ones after your death.
It is vital to review and update your will periodically. For example, if it refers only to children, you may want to update it after grandchildren enter the picture. And if you marry, divorce, or remarry, you likely want to amend the beneficiaries of your will as well.
Avoid Probate with a Trust
Many high-net-worth individuals hold their assets in a trust for several reasons:
- It may help manage taxes while still allowing for control over the assets.
- It bypasses probate upon the settlor's death.
- It may allow the trust settlor to preserve assets for the heirs by shielding them from being counted in means-tested government programs such as Medicaid.
Bypassing probate is at the top of the list for those who desire privacy. Probate proceedings are matters of public record. In states where court records are available online, just about anyone may look up the details of an estate. Those with significant assets are unlikely to want their neighbors to know exactly how much was distributed and to whom. Trust information is private. Any funds transferred via a trust may remain confidential if the parties desire privacy.
Another benefit of a trust is it helps those who want to place conditions on their loved one's use of their funds. For example, suppose you do not want your adult child to suddenly become super wealthy due to concerns about how they might spend the money. In that case, you might require the trustee to provide them with income from the trust and limit other withdrawals. Other types of trusts, like spendthrift trusts, are specifically designed to help curb overspending and safeguard the principal asset to preserve its value. Generation skipping trusts can be important too.
It may be daunting to engage, but to avoid emotion-laden family conflicts, it can be very important to talk with your families and/or other intended beneficiaries about when and how you plan to distribute your assets – during your lifetime and/or after your death.
For many, focusing on the numbers can be objective and straightforward. But when it comes to this final set of issues, things get gray because of emotional factors. With no “right answer”, you may want to give some thought now in over time to questions like these:
- How much would you like to give to charity, and how much to your family?
- Will you divide your assets equally among your heirs, or on some other basis; for example, on the basis of need or good behavior? What behavior do you want to reward?
- Do you want your family members to learn about financial matters, and/or philanthropy, while you are still here to guide them?
- What form does your estate take, cash, securities or other assets, given outright or in trust? Can your heirs handle the responsibility of managing their own finances, or will they need help? If you decide to use a trust, how broadly or narrowly do you want to constrain use and enjoyment? How long will the trust last? Who will serve as trustee?
- If you decide to create a living or testamentary trust that might have a very long life, and you may want to appoint an institutional trustee, know that different states have different rules that govern trustee flexibility in taking guidance from a ‘trust advisor’ (not permissible in all states) and in making distributions (more or less flexibility, depending on the state).
- Will you make current gifts, or bequests? Are your assets of a size that moving them out of your taxable estate, during your lifetime, will reduce your ultimate estate and gift tax bill? Might you want to enjoy seeing the effects of your gifts during your lifetime?
- How will you handle gifts of tangibles (art, jewelry or furniture)? Are there items of particular sentimental value to particular heirs? Are there items that your heirs might find particularly burdensome to use or dispose of?
- How and when will you communicate your plans to your heirs? Are there any legally required or advised disclosures? What kinds of communications will best support your family relationships?
It’s Up to You
As you work through these decisions, remember that your assets are yours, and you are free to dispose of them as you see fit. While you can control what and how you give, you cannot control the reactions of the recipients, how they treat the assets, or how they treat each other.
Gifting equally to heirs, for example, may seem fair – or it may cause the richer heirs to feel guilty, and the poorer ones to feel resentful. All you can do is to try to lay the groundwork for healthy family relationships.
Finally, as with most aspects of the estate-planning process, the decision on when and what to communicate to heirs involves trade-offs that depend on individual personal circumstances.
For some heirs, knowledge of a future inheritance may act as a disincentive to provide for themselves, or create expectations that may conflict with your final decisions. In other cases, heirs who are responsible and mature can and should be brought into the process early on.
Making decisions about the disposition of your assets can be an emotionally fraught and time-consuming process. Take small steps and seek guidance to help you develop your plans for the financial care of your families.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.
1 High-Net-Worth Individual (HNWI), Investopedia, https://www.investopedia.com/terms/h/hnwi.asp
2 68% of Americans Do Not Have a Will, The Conversation, https://theconversation.com/68-of-americans-do-not-have-a-will-137686