After a business succession plan is chosen, implementation may occur over many years. Meanwhile, an estate plan frequently remains securely tucked away. But that is a mistake. To ensure that an estate plan meets needs for successful transition of a business, periodic review must take place.
Evaluate whether the estate plan is still coordinated with the business transition plan
- Has someone familiar with the business been named as the fiduciary? If the trust owns an interest in the business, make sure that the trustee understands the business and can implement the exit plan.
- Has the estate plan waived the fiduciary's obligation to diversify assets? If not, the trustee may be required to diversify and sell a portion of the business. Consider including language that specifically directs the trustee to retain the business interests as an investment of the trust.
- Has appropriate planning taken place for beneficiaries not involved in the business? The plan may include creating voting interests for involved beneficiaries and nonvoting interests for beneficiaries not active in the business. Or, consider directing the trustee to allocate business interests and assets to the family members or managers participating in the business, and non-business assets to family members not participating. Are the business and non-business assets liquid enough to meet succession goals? Equal is not always fair.
- Are business interests held in an entity that is susceptible to partition or forced liquidation? This is of particular concern to businesses operated as sole proprietorships and general partnerships because beneficiaries could force a sale of the business.
- Does the plan allow the fiduciary to be involved in the business despite a conflict of interest? Consider using language that explicitly allows the trustee to serve as a co-owner, officer, director or employee of the business.
- Does the plan still reflect personal goals and desires? Is the business transition proceeding as planned – and if so, does the estate plan still complement the business plan to shift ownership or make generational change? If the transition has changed course, the estate plan will need to be revised accordingly.
Which other pieces of the estate plan should be reviewed?
- People. Are all the individuals named as fiduciaries (personal representative, trustee, etc.) and beneficiaries in the plan still alive? Have relationships changed such that they are no longer desired fiduciaries or beneficiaries? Have marriages, divorces, births or deaths changed wishes? Have key individuals in the business changed since the plan was drafted? Has the business moved to a different state since the plan was drafted?
- Entities. Has the business changed form or name? Has personal interest in the entity changed? Has a role in the entity changed? If charities are named in the plan, are they still in existence?
- Assets. Have personal assets changed significantly? In 2014, estate tax is imposed on estates in excess of $1 million in Oregon, in excess of $2 million in Washington, and federal estate tax is imposed on estates in excess of $5.34 million. There is no estate tax in Idaho. If assets have crossed any of these thresholds since the estate plan was drafted, it should be re-evaluated.
Does the structure of the estate plan still make sense under the current estate and income tax laws?
Federal estate tax laws have undergone a number of dramatic changes in the past five years. In particular, plans drafted before passage of the American Taxpayer Relief Act of 2012 (when the estate tax exemption was set at $5 million for 2011 and indexed for inflation, permanently unified with the gift tax exemption, and made portable) should be reviewed to ensure they accomplish goals in the most simple and tax-efficient manner.
The federal estate tax exemption increase has made the complicated planning that was previously done unnecessary for some clients. Estate planning documents that used trust funding formulas based on federal exemption amounts now have drastically different (and potentially undesirable) effects.
Additionally, because of the higher federal estate tax exemption and portability of the exemption between spouses, maximizing income tax benefits has become more important than estate tax planning in many cases. Depending on when the estate plan was drafted, review it to ensure that income tax planning opportunities are being maximized.
Do documents allow a representative to obtain one's medical information?
Ensure that power of attorney contains a Health Insurance Portability and Accountability Act release. It will allow the agent to obtain one's health information that would otherwise be protected from disclosure. While HIPAA is not a new law, many estate planning documents do not contain HIPAA-compliant provisions allowing the release of information. These releases are critical in cases of incapacity.
Do documents contain provisions about digital assets?
It is important not to forget the transition of digital assets and digital devices. This includes, among other things, laptops, cellular phones, emails, digital music, digital photographs, software licenses, domain names, blogs, listservs and online accounts. The same practices that make it difficult for hackers to steal personal information (choosing strong passwords and regularly changing them) make it very difficult for someone to act on another's behalf with respect to those assets and devices in the event of death or incapacity. If estate planning documents do not include provisions dealing with these assets and devices, consult an attorney familiar with planning for these assets to update documents.
No matter how carefully an estate plan is crafted, it cannot possibly account for every change in one's life or the law. It is only a snapshot in time of what was desired when it was documented. To ensure that an estate plan will accomplish goals and properly implement a transition plan, it must be reviewed periodically.
A version of this column originally appeared in Daily Journal of Commerce (Oregon), sister publication to The Daily Record.