ESTATE PLANNING FOR BUSINESS EXECUTIVES

As a business executive, you're used to strategizing and meeting career goals. But have you devoted time to strategizing and creating goals to protect your family from financial harm? If not, we're here to help you address some of the legacy goals professionals like yourself often have when looking to their future.

Protecting Your Hard-Earned Money from Lawsuits and Creditors

Although you may be protected from liability arising from your job, there are other circumstances in which you may be vulnerable to lawsuits. With more responsibility comes higher risk to your personal accounts and property. One way to protect your assets is to ensure that you, or your employer, has appropriate directors and officers liability insurance. A second way is by using irrevocable trusts like the ones described below.

Domestic Asset Protection Trust

A domestic asset protection trust (DAPT) is one tool you can use to protect your assets. This type of trust is irrevocable, meaning it cannot be changed once drafted. How it works is you transfer ownership of some assets to the trust. The trustee of the trust can make distributions to you, thereby allowing you to continue enjoying the benefits of the trust property. However, in most cases, the trustee needs to be independent (someone who isn't related or a subordinate to you or any trust beneficiary). In a DAPT, the trustee usually cannot inherit anything from the trust as well.

The goals of a DAPT are to:

• Allow you to fund the trust with your own money and property,

• Maintain an interest in the trust as a beneficiary, and

• Protect that money and property from your future creditors.

DAPTs work on the legal principle that someone cannot take away from you something you no longer own. When you transfer property into a DAPT, you are making a gift of it to the trustee on behalf of the irrevocable trust.

The laws governing DAPTs are continuously evolving and state-specific. It is important that you work with an experienced estate planning attorney when creating a complex trust such as this.

Lifetime Qualified Terminable Interest Property Trust

A lifetime qualified terminable interest property (QTIP) trust is an irrevocable trust created by a trustmaker spouse (who usually has more money and property) for the benefit of the beneficiary spouse. The trustmaker spouse can create and fund the trust without using any gift tax exemption. Instead, they rely on the unlimited marital deduction, which allows spouses to gift money and property to each other without tax consequences.

During the beneficiary spouse’s lifetime, they will receive all the trust income. They may also be entitled to receive trust principal for limited purposes. When the beneficiary spouse dies, the remaining accounts and property will be included in their estate. This, therefore, makes use of the beneficiary spouse’s otherwise unused federal estate tax exemption. If the beneficiary spouse dies first, the remaining trust property can remain for the trustmaker spouse’s benefit (subject to applicable state law). The rest will be excluded from the trustmaker spouse’s estate when they die.

Spousal Lifetime Access Trust

A spousal lifetime access trust (SLAT) is an irrevocable trust created by the trustmaker spouse for the benefit of the beneficiary spouse. It is used to transfer money and property out of the trustmaker spouse’s estate. This strategy allows married couples to take advantage of their lifetime gift and estate tax exclusion amounts. The trustmaker makes a sizable permanent gift to the SLAT that decreases the value of their estate while maintaining some limited access to the money and property that is gifted for the beneficiary spouse’s benefit.

The trustmaker spouse gives money and property (of which they are the sole owner) to the SLAT for the benefit of the beneficiary spouse. The trustmaker spouse reports the gift on a gift tax return. The beneficiary spouse can receive distributions from the trust, from which the trustmaker spouse may also indirectly benefit. Upon the death of the beneficiary spouse, the trust assets are transferred to the remaining beneficiaries (usually children and grandchildren), either outright or in trust.

When considering these types of trusts, it is critical that you work with an experienced estate planning attorney. These trusts usually have very strict requirements that must be met in order to provide you with the protection you are looking for. It is also important to understand how much control you will be giving up to protect your hard-earned money.

Asset Protection for Your Loved Ones

Because you have worked hard to accumulate your wealth, you likely want to protect it even after you're gone. There are a few types of trusts you can use to effectively leave a legacy for your family.

Discretionary Trust

With a discretionary trust, the trustee uses their discretion as to when distributions of money or property are made. Because your beneficiary will not be guaranteed a specific amount of money or piece of property, funds can be better protected from the beneficiary’s creditors or even a divorcing spouse. A discretionary trust can be included as part of another document or can be completely separate.

Irrevocable Life Insurance Trust

An irrevocable life insurance trust (ILIT) is another valuable strategy that protects your loved one’s financial well-being. The ILIT owns a life insurance policy on your life and receives the death benefit upon your passing. Because the death benefit is paid to the trust instead of outright to your beneficiaries, you can protect the death benefit from the beneficiaries' creditors, lawsuits, or future divorcing spouses. Beyond asset protection benefits, a properly structured and executed ILIT can also significantly reduce future estate tax liability. This is because the life insurance policy is owned by the trust and payable to the trust. It will not be taxed as part of your estate upon your death.

Standalone Retirement Trust

A standalone retirement trust (SRT) is a special type of trust separate and distinct from your revocable living trust. It is designed to be the beneficiary of only your retirement accounts after your death. When drafted as an accumulation trust, an SRT protects the inherited retirement account from the beneficiary’s creditors. An accumulation trust requires that any required minimum distributions taken from the retirement account are reaccumulated back into the trust. Similarly, if the retirement account must be liquidated (which is usually the case 10 years after the original owner’s death), the funds remaining in the account are accumulated into the trust, not given outright to the beneficiaries. While there can be drawbacks to an accumulation trust, such as distributions being taxed at the trust income tax rate, some people find that the benefits outweigh this potential burden.

An SRT drafted as an accumulation trust ensures that the inherited retirement account remains in the family and out of the hands of in-laws and former in-laws. It can also enable proper planning for a disabled or special needs beneficiary.

Protecting Your Hard-Earned Money from the IRS

Like most of us, you probably want to pay as little tax as possible. Depending on what other assets you own, you may want to meet with a tax professional about the best way to save on income taxes. Luckily, our sister company Ohio Tax Advocates can help you with just that. They not only serve as tax planning experts but tax preparing experts as well.

Also, if a stock option was presented to you as part of your compensation package, you may need professional guidance before taking action. Depending on the type of stock option you were given, it may need to be reported as taxable income once it has been granted. That tax might be due when you decide to sell the stock. Because of the various tax implications, it is important that you work with a professional to plan if and when you would like to exercise your stock option and when you sell the stock.

Estate and gift tax should always be in the back of your mind as you accumulate wealth. Depending on how much you make each year, and other accounts and property you own, estate tax could become an issue. Although the rate is high right now, at $12.92 million per person for 2023, this rate will sunset December 31, 2025, and return to $5 million, adjusted for inflation. It is quite probable that you could have an estate tax issue by the time you pass away.

Protecting Your Hard-Earned Money from Prying Eyes

If you work for a large company, keeping the details of what you own and who will receive it private may be critical to ensuring the privacy of your loved ones. If this is important to you, you need an up-to-date estate plan. Specifically, you should consider using a trust to keep your business out of the public and costly probate court process.

If You Have No Estate Plan

Without an estate plan, your loved ones will likely have to go through probate. This is a public, time-consuming, and costly process of gathering your accounts and property and distributing them to your heirs. Important information will become part of the public court record. This may include an inventory of everything you own, a list of all the people receiving your money and property, and how much each will be receiving. This means that anyone with a few dollars and some free time can go down to the courthouse and get these documents or get them online if your county provides them. Also, without any plan, state law will determine who receives your money and property, how much, and when.

If You Have a Last Will and Testament

If you have a will, you can dictate who will receive your money and property, how much each person will receive, and when they will receive it. However, your estate will still need to go through the probate court to be processed.

If You Have a Trust

With a trust, you can specify who gets the money and property in the trust, how much they will receive, and when they receive it—without court involvement. In most cases, the trust AND any additional information such as an inventory or accounting will not be provided to the probate court. The public will not be able to access it.

With the many options available to you, it is important that you have a professional you can trust to talk to. We are committed to helping you evaluate and meet the goals that are most important to you. Call us at 614-389-9711 to schedule a meeting and discuss.

Want to learn more about how your estate planning documents work together to protect your legacy? Download our Consumer's Guide to Estate Planning in Ohio here.

About the Author - Gregory S. DuPont, JD, CFP

Greg has been serving clients as an estate and tax planning attorney in Ohio since graduating from Capital University Law School in 1992. He obtained an accounting and finance degree from The Ohio State University. As a Certified Financial Planner, a designation that requires advanced coursework in a complete range of financial subjects, he is a rare financial professional who can provide cross-disciplinary solutions from the legal, tax and investment perspectives.

Greg is the co-author of the book: Protecting Your Future with Tax-Free Long-Term Care, and is a contributing author in Jack Canfield's best selling book The Recipe for Success.

He has been named one of Ohio's Top 100 lawyers, an invitation-only designation given by The National Advocates.