We All Have A Succession Plan

I tell my clients that every person has an estate plan, and every business has a succession plan. However, the plan may have been written by legislators and common law judges 150 years ago, or it may be decided by a county judge five years from now.

There are many laws in the Indiana Code and many more made by judges (common law) that will decide what happens to your estate or your business if you don’t take the initiative to make a plan for yourself. The law will also decide what happens to you and your estate if you become incapacitated and unable to make decisions.

If you don’t have a will or other planning documents, the Indiana Probate Code will determine who inherits your wealth. If you don’t have a Buy-Sell Agreement, the Indiana Code or common law will supply one for you. Perhaps it will be the Indiana Business Corporation Law, or perhaps the Indiana Business Flexibility Act, or perhaps the Indiana Professional Corporation Act, or perhaps it will be the ruling contained in a fifty year old case that will decide what happens to your business if you and your partner deadlock on an important business decision.

Parts of your estate plan may also be found in a variety of innocuous looking documents that you signed when you opened your bank and investment accounts years ago. Do you know whether your beneficiary designations are all current? Unfortunately, it’s common for an individual to forget to update the beneficiary designation on a 401k account or a bank account or an insurance policy. These overlooked items may be forgotten until the survivor calls the insurance company and finds out the proceeds are being distributed to the ex-spouse or into the estate of the deceased spouse triggering a large tax event that could have easily been avoided.

I also tell my clients that we all have a tax plan at death. But it has the same problem. It was written by legislators and is found in the federal and state tax codes. And the government plan may well include depositing a large portion of your estate into the state and federal coffers.

The good news is that all these plans are optional. In each of these cases, we can develop our own estate plans, and business succession plans, and tax plans. And they don’t necessarily need to be complicated or expensive to put together. It may be as simple as a Last Will and Testament or a Buy-Sell Agreement for your business.

The same is true for death taxes. In many cases, some simple planning will eliminate estate tax or provide the liquidity to pay death taxes. And even in very large estates, the US estate tax is actually optional. (People are usually surprised to hear that). But the truth is, there is a dollar for dollar deduction on the federal estate tax return for charitable bequests. And when a client is faced with the choice of cutting a check to the US Treasury or a check to a family foundation, most clients would opt for the foundation, where the funds can be managed by the family and create a lasting legacy.

But you need to put your plan in place if you don’t want the governments’ plan for you.

And the question of “what’s your succession plan?” doesn’t end with you and your family. You also need to consider what are the succession plans of your trusted advisors? You need to ask yourself what happens if your banker, your accountant, your lawyer, or your investment advisor leaves or retires. Do your advisors have a succession plan in place if a major partner leaves or dies? It is not bad form to ask your advisors what their plan is for you in the event of the unexpected. Rather, it is prudent for you to understand your areas of risk.[1]

Everybody’s situation is unique. At Pile, we listen to you. We make sure we understand what you want to accomplish. We will help you identify your areas of risk, explain your options, and help you think through the possibilities. We do not sell products. Rather, we develop custom plans based upon the needs and desires of our clients. Sometimes the plans are simple. Sometimes they are complex. Again, everybody’s situation is unique.

And when it comes to succession planning, at Pile, we practice what we preach. RJ Pile has been in business since 1938, and Pile Wealth Management since 1998. RJ Pile is in its third generation of owners, and PWM is in its second. The faces have may have changed over the years, but the philosophy has not. We are still locally owned and provide practical and savvy solutions with integrity. We are proud to be trusted advisors to our clients.

January is an opportune time to call or meet with your advisors to review your estate, succession, investment, and financial plans. And January 2011 is particularly significant in that several major changes to the federal estate and gift tax laws have created new transfer opportunities that took effect on the first of the year and will be available through the end of 2012.[2] If you would like to discuss our process for performing a review of your plans or any aspect of them, give us a call.

[1] For an example of a good succession plan, one can look to Dimensional Fund Advisors (one of the families of mutual funds recommended by Pile Wealth Management). DFA is in the process of transitioning to a new CEO. The transition is orderly and transparent. See the December 2010 letter from David Booth, Chairman and Co-CEO of DFA found at Dimensional (DFA) Succession Plan.

[2] Some useful information on the new estate and gift tax laws can be found at CCH Estate, Gift, and Generation-Skipping Transfer Tax Summary.