Like many owners of family-run businesses, it was Robbie’s dream to have his family follow in his footsteps when he was gone. Unfortunately, Robbie never planned to deal with estate taxes. He died on January 7,1990.
Through the marriage deduction, he passed to his wife the illustrious franchise and the stadium which bore his name. Regrettably, his wife passed away soon thereafter and due to lack of planning, a staggering Estate bill estimated at about $47 million was left behind. Differing views amongst his nine children only exacerbated the situation and forced the cash-poor family to sell the legacy Robbie had worked so hard tobuild. In 1994, the family sold both the team and the stadium for a total of $138 million.
At that time, the sale price, even after estate taxes, was impressive. Today, many would argue that the Dolphins and the stadium – now known as Pro Player Stadium – might be worth twice as much. Most importantly is the fact that Robbie’s intentions were defeated as his family was removed from the success he worked so hard to build.
Just because you have been able to accumulate wealth does not necessarily mean that you will be able to transfer the majority of it. Transfer of assets to heirs requires diligence. To transfer wealth in your desired manner, it is important to be wary of certain mistakes common to men.
Some of these mistakes include:
The first most common mistake is to do nothing. You may think that in the event of your death, things will proceed the way you wish or that you have too little valuables to worry about. If you pass away without even a simple plan, everything you have will be divided according to the laws of your State and/or tradition. It is important that at the very least, you have a Will to determine where your belongings should go.
The second basic and all too common mistake is failing to have a Will. A Will facilitates the administration of your Estate, allowing you to choose the Executor of your choice and the guardian(s) of your children (where minors are involved).
The third biggest error is to believe that a Will is enough. Particularly with complicated Estates, a Will may not be enough to cover all of your assets. Do you have more than one wife? Are you divorced and remarried? Do you have children from more than one relationship? Does your spouse have children from another relationship? All of these things can cause legal problems down the line when it comes to the time of settling your Estate. Having a Trust in place can help prevent some of these issues.
It is important to consider the age of the individuals you name as beneficiaries. Remember that generally, death benefits cannot be paid directly to minors. So if you name a child as beneficiary, the funds often have to be paid into court or to the Public Trustee. In addition, once a minor reaches the age of majority, he or she will be entitled to the funds without any restrictions.
If you want the death benefit to go to a minor, it is recommended that you establish a Trust to receive the funds on behalf of the minor. The terms of the Trust can set out how you want the funds to be invested and when payments are to be made for the benefit of the minor. If done properly, the Trust could qualify as a Testamentary Trust with the associated benefits thereof.
Unless there is a specific reason for having assets flow through your Estate such as to apply towards any special instructions contained in your Will, it may be a better idea, where possible, to acquire investments in the name of a beneficiary directly..
Remember that your matter may become one for the public to view if it goes through probate. This may also delay the distribution of your Estate by weeks, months or even years if your Will is being challenged When an investment is acquired in the name of a beneficiary other than your Estate, the death benefit bypasses your Estate and therefore avoids probate fees (and potentially other estate administration fees). By avoiding your Estate, the death benefit may also avoid claims by creditors of the Estate and challenges to the validity of the Will.
Having no cash may mean absolute hopelessness, particularly if your family’s wealth includes large real estate holdings or a business. Estate taxes can mean the loss of treasured family assets. In a recent survey among beneficiaries of successful family businesses whose businesses failed after they were passed on to the next generation, about 97.9% had to liquidate their assets to raise the cash to pay Estate taxes, regardless of whether it was a good time to sell. In addition, a forced sale of an asset can result in not only the loss of the asset but also a significant loss in value to your family due to the poor timing.
This often happens in an attempt to make distributions to heirs equal. However, “equal” may not always be “equitable.” This is particularly true in a family business. Leaving control of the family business equally among siblings is a spark for business failure. Control, for decision making purposes, can be placed in the hands of the most qualified heir while value (the worth of the business) can be shared equally by all heirs. However, we recommend that an institutional Trustee takes control.
Things which matter most must never be at the mercy of things which matter least. Wealth transfer is about priorities, making the right decisions and choosing the “best” course of action. Think about the construction of a house. You begin with the kind of house you want, a clear picture of what it should look like. Thereafter, plans are formulated, a blueprint is prepared. All of this is done before one board is cut or one nail is driven.
Also, someone is put in charge of seeing that the project stays on track. You would not just begin building one room here and one room there, hoping that it all fits together. Yet, that is the process that many are forced to use when it comes to the transfer of their wealth – one document here, one Trust there. No integrated game plan, no sense of what it should look like when it is done, no coordination, no one responsible for keeping it all on track. The results are often disastrous: extra costs, too much to pay as taxes, details not completed and missed leveraging opportunities.
In the case of a beneficiary with a substance-abuse problem or a spending habit, instruct the Trustee to restrict or approve payouts based on an objective mechanism, say periodic drug tests, until the black sheep shapes up. Do not ask a family member to take on this responsibility. Instead, appoint a competent Trustee company to handle this responsibility.
Making these simple wealth transfer mistakes can lead to legal battles that will diminish your Estate and leave little or nothing to your beneficiaries. If you do not have an Estate Plan, arrange for a professional (which may be an Institutional Trustee Company) to prepare one for you.
Review your existing Estate Plan documents and beneficiary designations regularly, particularly after a life- changing event, to ensure they still reflect your wishes and amend or update them as necessary. In addition, meet with your professional adviser to discuss your wishes for wealth transfer in order to ensure that your assets are distributed as you wish.