Ian Macdonald is a lawyer with Wright, Johnston and Mackenzie, Solicitors, in Glasgow, Scotland specialising in tax, trusts and estate planning.
In order to safeguard your assets, estate planning should be actioned early and on a regular basis. There are seven key stages of planning and they can be well illustrated by Jaques' famous speech describing the Seven Ages of Man
"All the world's a stage… and one man in his time plays many parts, his acts being seven ages."
As You Like It, Act 2, Scene 7. William Shakespeare
The need for estate planning is constant but the priorities alter as families develop, as individual members grow older and as their circumstances change. I will look at the main estate planning needs and opportunities of the typical business family (which of course does not exist) by reference to Jaques' famous speech describing the 'Seven Ages of Man'. Lest there be any doubt, although the speech refers to 'Man', the ages (and estate planning principles) apply equally to all.
I must start by explaining what I mean by 'estate planning'. Estate planning is organising your assets to meet your personal, family and financial objectives within the constraints of your family business and the relevant tax rules.
This article will not deal specifically with tax, which of course varies considerably from country to country. It is always good practice to set out what you would like to achieve without reference to tax and then ask the specialists to provide a structure and refinements to achieve the objectives in the most tax-efficient manner.
Estate planning is also distinct from day-to-day management of assets and investments, which is best left to the experts, especially in difficult world and market conditions.
One last general point before our actor steps on the stage – the estate being planned includes a combination of the family business (if you are an owner) and other assets that have been accumulated by saving or inheritance.
"At first the infant, mewing and puking in the nurse's arms."
Young children are not going to be doing much estate planning themselves but they can still be the recipients of assets from older generations. At this stage, gifts and transfers will not be direct to the child but are more likely to be through trusts. In a trust, an additional person or group (the trustees) is inserted between the donor of the property (the settlor or truster) and the recipient (the beneficiary).
Trusts have three main purposes and two or more can be combined in the same trust:
- protecting assets when the recipient is young;
- keeping control over assets by determining not only the initial beneficiaries but also where the assets will go in the future;
- saving tax.
A directed approach
"And then the whining schoolboy with his satchel and shining morning face, creeping like a snail unwillingly to school."
The schoolboy is still too young to be taking any action himself with assets but it may by now be clearer how the child is going to turn out – genius or struggler, model citizen or tearaway, and so on. In particular, there may be some indication whether the child is likely to be interested in joining the family business in some capacity in the future. This means that estate planning can be more directed and the key to this is having put in place enough flexibility at stage one. If not, the first steps may have to be undone already.
"And then the lover, sighing like a furnace with a woeful ballad."
For those who are married or in long-term relationships (and, in fact, just about everyone else), the most important single estate planning step is a well thought out will. This deals with a number of important aspects apart from setting out the distribution of assets on death:
- appointment of executors to be responsible for the administration of the estate;
- appointment of guardians to care for young children;
- legacies of specific items including business interests;
- continuing powers for executors if money will be held in trust under the will;
- tax saving provisions.
It is important not just to make one will and forget about it. Wills should be reviewed whenever there are major changes in personal or financial circumstances and about every five years even if nothing seems to have changed.
Every family has different views on whether succession should be exclusively through the blood line or whether spouses should have a role in the family business or other assets. This is not surprising in an era when divorce and remarriage – and long-term relationships where the couple choose not to marry at all – are common and there is often an understandable reluctance to give major assets to a spouse in case they subsequently leave the family. Trusts have a valuable role to play here.
"Then a soldier, full of strange oaths and bearded like the pard."
Despite the sensitive political times in which we live, only very few people now serve in the armed forces of their countries. But this is a stage of life when other matters of life and death should be addressed. What would be the financial effect of the untimely death of a family member to the rest of that family? To the family business? The difficulties of this situation can be eased by well-planned life insurance that gets money into the right hands at the right time.
Most life insurance should be written in trust to ensure flexibility if the policy pays out and this will probably speed up payment and save tax as well. Insurance can also provide a lump sum or regular payment if serious illness strikes and prevents someone working for a long period. Some of these benefits may be provided through the business but everyone should consider what is right for their own families and family businesses.
"And then the justice, in fair round belly with good capon lined, with eyes severe and beard of formal cut, full of wise saws and modern instances."
This is the stage where planning for retirement reaches its most critical stage. Specialists commonly say that the most important and effective retirement planning should be done in your 20s but in practice it is often only in the last ten years or so before retirement that family commitments and financial circumstances allow proper planning to take place. Much of your wealth may be tied up in the business and you will have to plan – and soon implement – your exit strategy. If the business is to continue, your future financial provision must come from somewhere else.
Power of attorney
"The sixth age slips into the lean and slippered pantaloon,with spectacles on nose and pouch on side."
You have successfully passed on your business and have secured your financial position. Hopefully you are still in good health but have you thought how your assets would be dealt with if you suffered an accident or illness – sudden or gradual? Now is the time to appoint one or more trusted people – family members or advisers or a combination – who can look after your affairs should that unfortunate need arise. This is done by a simple document often called a Power of Attorney, although the legal terms and procedures will vary from country to country.
What does not vary is that the legal procedures, which will be required to deal with assets if there is no Power of Attorney, are always more complex, time-consuming and costly. This is one of the simplest yet most effective planning steps you can take.
"Last scene of all that ends this strange eventful history is second childishness and mere oblivion, sans teeth, sans eyes, sans taste, sans everything."
With the average age of the population in most developed countries increasing steadily as life expectancy increases and fewer children are born, even those countries with extensive state healthcare systems cannot expect to finance care 'from cradle to grave'. This means that when nursing care is needed, the cost will probably have to be borne by the person requiring care.
This is an area where insurance companies are rapidly developing new policies to help meet the substantial costs of care. When you are 'sans everything' is not the time to be planning for long-term care and this emphasises the two themes of this article – plan early and review regularly.