For many of the executives I work with, the holidays are a special time. They give them a chance—if only for a day—to take a break from their demanding careers and spend time with family and friends. I don’t know one top-level executive who wouldn’t say that their family and close friends are an important facet of their life. The holidays offer an opportunity to reflect on the things that we are all thankful for, but very few people take the time to consider what happens to those things and people we are thankful for when we are no longer around.
Estate planning may not be the number one topic on the list of things to talk about around the holiday table. In reality, however, it is an important aspect of everyone’s life, especially high-level executives who work so hard to accumulate wealth throughout their lives. That’s why I’d like to discuss estate planning for wealthy families more in depth, including key strategies to implement and considerations to make now to ensure your family is cared for later on.
Learn more about Wade Carpenter and Team’s estate planning services.
Estate Planning for Wealthy Families: Questions to Consider
There are some key questions to consider when any family is contemplating their estate planning strategy moving forward. As a precursor to these questions, it’s important to note that working with an experienced financial advisor who advocates also working with a trusted estate planning attorney is the best decision you can make in your estate planning process. Once you have established your estate planning team, consider the following questions before implementing any strategies:
- Do you have enough retirement income? This is an imperative question to ask, even if you have never been concerned about meeting an income need before. You can’t take care of family, friends, and charities before you have met your basic needs first. So we recommend working with an advisor to plot out your retirement income needs, and accounting for costs such as housing and medical expenses that could arise in the future. Once you have ensured that you and your spouse will be able to live a comfortable retirement, you can proceed further.
- Do you want to leave money for your children? If you and your spouse are taken care of financially, another decision to make involves the legacy you want to leave your children. An experienced advisor can help you weigh the pros and cons of gifting assets now vs. leaving certain assets behind as part of your estate, such as highly appreciated stock that you have accumulated through your years of being offered equity compensation packages.
- Do you want to donate to charity? If leaving money for a charity or multiple charities is a desire you and your family have, then you should certainly allow it to steer your estate planning process. Some executives worry they must choose between leaving money to children or family members, and leaving money to charity. The reality is, there are charitable giving strategies that allow you to effectively meet both needs, including a charitable remainder trust or a charitable lead trust.
Once you’ve answered these basic estate planning questions, you can work with your wealth manager to effectively implement strategies to carry out your wishes.
Estate Planning Strategies for Wealthy Families
With an ever-changing tax code, estate planning will always be an ongoing process. The good news is there are some tried-and-true estate planning strategies that wealthy families can continue to utilize. Let’s explore two below.
Leaving Concentrated Stock
One of the most reoccurring themes we see among top-level executives is the concentrated stock they have accumulated in their investment portfolio. This is a side effect of success in the corporate world when you’re rewarded with equity compensation. More often than not, the concentrated stock also is highly appreciated, meaning you have held it long enough that your cost basis is much lower than the current fair market value of your employer or prior employer’s stock.
As we alluded to in the consideration about leaving money to your children, there are benefits to leaving behind particular asset classes as opposed to gifting them to family or friends during your lifetime. One of the asset classes that holds a big benefit when left behind for children to inherit is concentrated and highly appreciated stock.
When you leave behind stock for your children or other family members to inherit, they receive the stock with a new cost basis, otherwise known as a step-up basis. For example, if your cost basis on your concentrated stock is $20 a share, but the current market value is $75 a share, whoever inherits your stock will have a cost basis equal to the market value, which is $75 a share in this case. This is a considerable benefit that’s only amplified by the number of shares that you own, since your children would pay capital gains tax only on the amount over the market value when they inherited the stock, rather than you selling and incurring the large capital gains tax before leaving the funds to your children.
Alternative Estate Investments
When it comes to investments that executives can utilize to reduce the size of their overall estate, the options can feel like slim to none. However, there is one alternative estate investment we have helped clients with in the past to reduce the size of their overall estate while still yielding returns based on their age: life insurance.
In one particular case, a client was able to purchase a second-to-die life insurance policy that would pay his children $6 million when he and his wife both passed away. When we did an analysis on the numbers, we found that his initial investment in the life insurance policy of $500,000 would return 5% year over year if he and his wife both lived to the age of 90. Of course, if they passed away before then, the initial investment would yield a higher return and a lower return than 5% if they passed away after the age of 90.
Regardless of the final outcome, this strategy helps with the tax-free advantage the life insurance proceeds would allow, as well as removing the $500,000 from their taxable estate. This type of strategy can be very effective if you work with an experienced executive financial advisor as well as a trusted estate planning attorney to implement it.
Estate Planning for Wealthy Families Requires Personalized Planning
When it comes to estate planning for wealthy families, there is no one-size-fits-all solution. In addition to considering the key questions and strategies mentioned above, you should consider how well your advisor knows what you want to accomplish. This is one of the reasons it is important to work with a trusted advisor who you feel comfortable sharing goals and aspirations with. The better they understand your wishes, the better the recommendations they can make when it comes to your estate plan.
K. Wade Carpenter, CFP®, AIF®, ChFC®, CLU®, is an innovative wealth manager serving corporate executives and entrepreneurs from coast to coast. Throughout his more than 25-year career, Wade’s focus on C-level clients has made him a top strategist for estate planning for executives and their families.
Learn more about how Wade and the Carpenter Team can guide your family’s estate planning process during a complimentary consultation.
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