Finance Quarterly
SEPTEMBER 2011
By Wendell Lee,
Tax Partner
ACCUITY LLP
THE ULTIMATE ESTATE PLAN
IS NOT WHAT YOU MIGHT THINK
SEPTEMBER 2011 · HAWAII BUSINESS 65
FINANCE QUARTERLY
The Ultimate Estate Plan Is
Not What You Might Think
By Wendell Lee, Tax Partner, Accuity LLP
I
t’s said that seven out of 10 estate
plans fall apart after the death of
the parents who set up the plan.
Legal documents like wills and
declarations of trust aren’t designed
to, and don’t, provide the information
necessary for children to understand
what their parents expect of them. As a
result, the surviving children often have or
develop different interpretations of their
parents’ intentions. Imagine that your
family is in a canoe. Mom and Dad have
steered and directed the canoe throughout
their lifetimes. Now imagine that Mom
and Dad are gone. Their children don’t
agree with each other and start paddling
in different directions. Before you know it,
they are arguing with each other and start
hitting each other with the paddles to get
their individual points across. In the real
world, whacks with the paddles manifest
themselves as lawsuits, and the assets
that Mom and Dad have accumulated
through their hard and diligent work
are spent on legal and accounting fees.
The worst part is that the children
don’t speak to each other anymore.
The ultimate estate plan is not just
about trusts and wills and complicated
planning ideas. To be successful, it must
consider the “Family Equation.”
The Family Equation involves working
with parents and family members
during their lives and assisting them in
navigating the complicated estate tax
decisions they need to make and the
consequences after their death. We believe
this is best accomplished by advisors who
are not selling products but instead are independently
and objectively viewing alternatives.
Here are some items that need to be considered in this
context:
Trustee Selection – Choosing a trustee is crucial.
Our first choice is a trustee whom you know and who
has a relationship with your children. We have found
that family members who are well organized and able
to interact with professionals can be excellent trustees.
Compare it to daycare for your child. A hired babysitter
can provide your child company, but can they be
WENDELL LEE
expected to instill your family values? Corporate and
professional trustees also can do an excellent job and
can provide multi-generational continuity, but their job
is to adhere strictly to the documents appointing them—and, as we mentioned above,
these documents are designed for legal effect, not family values.
Fairness versus equality – Many times parents provide equal shares in their gift and
estate planning. As a parent, I can understand how much easier it is to create such a
plan. However, after parents die these decisions can have unintended consequences and
add tremendous stress to sibling relationships, especially where a business is involved.
For example, suppose Child A is the executive director of a non-profit organization
and Child B is the president of the family business. The parents, wanting to provide
equality after their deaths, bequeath 50 percent ownership of that business to Child A
and 50 percent to Child B. Child B, who is working 80 hours a week to manage that
family business, wants to make major investment changes to the business but now has
to contend with Child A who might want the business to stay the same. If the siblings
disagree, no major decisions can be made, and the business and its employees suffer.
As a result, the two halves produce far less than the whole, and in addition there is now
a wedge driven between the two siblings. Possible solutions include providing Child A
with non-voting shares and Child B with voting shares that allow Child B to override in
these situations, or clauses allowing Child B to buy out Child A, if Child A needs cash
and wants nothing to do with or be involved with the risks of owning a business.
Incentive Trusts – An incentive trust is a way for a parent to manage from the grave
by special stipulations or milestones written in the trust document in order for the
beneficiary to receive money. The idea is to provide incentives to motivate children
FINANCE QUARTERLY
and not have them rely on their trust
proceeds. Many times, however, we have
seen how these provisions can actually
have unintended negative consequences.
Suppose a trust provides that a child is
to receive money only when he attains
the age of 40. Then the child develops a
serious illness at age 35 and needs money
for medical treatment, but can’t get a
dime out of the trust. Another popular
option is the dollar for dollar incentive,
where your children will receive a
dollar for every dollar earned during
their respective lives. On the surface
it sounds good, but what if one child
works at a non-profit organization that
helps the poor, earning $45,000 a year,
and the other works at an investment
bank in New York making millions.
Did the parents intend that almost all
of the trust assets go to the investment
banker? The takeaway is that incentives or stipulations to change a child’s behavior
can have unintended consequences. A potential solution is to provide the trustee with
the flexibility to govern situations down the road and reinforce behaviors you want
your child to have as if you were still around. This is easier said than done, making the
selection of the trustee crucial. When there is flexibility in your trust document, the trustee
can decide when it is appropriate or how much should be distributed to your child.
Heartfelt Letter – This is a non-legal document or letter to your beneficiaries and
trustees expressing your expectations, goals and ambitions for them. The letter is really
a heart-to-heart talk of what your expectations are of your children in regards to how
they live, treat others, and other lessons that you would like to impart to them. Likewise,
it informs your trustee about how you would run the trust if you were still alive. In
essence it is a transition document to hand over the reins of parenthood.
Family Involvement – Many wealthy parents are uncomfortable talking about
money matters with their children. However, in my experience there is always a time
that this information should be communicated to them; the question is when. This is
an area where a parent should understand how this information will affect their child.
Will this information allow your child to select a profession that they have a passion for
rather than seeking a profession based upon compensation? For example, a child may
have a passion for teaching, but recognizes that the income derived from teaching may
not be sufficient for his or her needs. Therefore, communicating to them before they
The Family Equation involves
working with parents and
family members during their
lives and assisting them in
navigating the complicated
estate tax decisions they
need to make and the
consequences after their
death.
FINANCE QUARTERLY
attend college may aid their decision to
choose a profession. Or your child could
be the total opposite and lose focus since
they feel it is not necessary to have any
educational goals. Every child is different,
but what is important is teaching your child the responsibility of their potential
inheritance and how you as a parent want this gift to be beneficial to them versus
potentially ruining their lives.
Responsibility– This encompasses not only financial responsibility, but a
responsibility to the greater community. We have many wealthy individuals who
donate to, advocate for, or otherwise
help – such as by volunteering or using
contacts to create awareness about –
great causes. When children see their
parent’s involvement in these causes,
we often see these wonderful traits
passed on to the next generation. In
contrast, we see parents who rarely
make charitable contributions, treat
vendors poorly, spend frivolously, are
demanding, and then wonder why their
children are like that.
Expect more…
more
EXPERTISE,
more VISION,
more INSIGHT
At Accuity LLP, our tax professionals uncover
savings through comprehensive knowledge of
the latest tax laws.
Accuity LLP…EXPECT
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Honolulu, HI 96813
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Wealth is based upon many years of
hard work and effort. Your legacy is not
about the wealth you generated during
your life but how that wealth is used
to help others and, more importantly,
the legacy you leave behind with the
next generation. After you have spent
a lifetime creating wealth, you can
engage in complicated estate and gift
tax planning, but that work, too, can
be undone in a few years if the next
generation dissipates it or drains it
through infighting. Estate taxes are
here to stay and most people need
professional help to navigate the legal
and tax complexities. But the ultimate
estate plan must incorporate the Family
Equation so that your estate plan has a
better chance of succeeding, and to keep
the canoe going in the right direction.
The contents of this article are
informational only. This article is
not intended or written to be used, and
cannot be used, for the purpose of (i)
avoiding penalties under the Internal
Revenue Code or any comparable state
law, or (ii) promoting, marketing or
recommending to another party any
transaction or matter addressed herein.