Easy, and essential, estate planning fundamentals
Estate planning is all about ensuring you are in control of what happens to your assets in the future. At its core, it counts on you having documents that lay out your wishes.
“The great news is [that potential legal] risks can all be mitigated or entirely avoided if you take some very straightforward steps.”
Managing Director, Strategic Wealth Advisor & Head of Art Planning Merrill Lynch Wealth Management
As a professional in the sports or entertainment industry, you may own a variety of items, may have a lot at stake, such as financial assets, intellectual property, homes and other physical property like cars and collectibles. However, it’s important to know that improper documentation or not using certain techniques can publicly expose the details of your estate, open the door for extensive legal battles among those who believe they are due a share, and create risks down the road to those who do inherit.
“Here’s the great news,” says Michael Duffy, Managing Director and Strategic Wealth Advisor for Merrill Lynch Wealth Management and Head of Art Planning for Merrill. “These risks can all be mitigated or entirely avoided if you take some very straightforward steps today.”
The essential documents you need
Every sports professional and entertainer should have these basic documents in place that address what will happen upon their death or if they become incapacitated:
A last will and testament
A durable power of attorney
An advance healthcare directive
Beneficiary designation forms
Duffy points out that these documents are needed by every adult regardless of how large or small your estate may be. However, the larger your estate is, and goals like minimizing estate-tax bills, creditor protection and creating an enduring philanthropic legacy are important, you should consider additional advanced planning tools. You can learn more about them in our “Wealth Optimization for Professional Athletes and Entertainers” whitepaper or by contacting your Merrill Private Wealth Management advisor.
“Even if you currently have a will, it should generally be reviewed every five years to make sure that it reflects current federal and state tax laws, your balance sheet, the heirs you wish to benefit and your goals.”
Managing Director, Strategic Wealth Advisor & Head of Art Planning Merrill Lynch Wealth Management
The Will establishes the way
“We understand that people drag their heels when creating a will, but it’s never too soon to have one,” says Duffy. “Wills are needed to ensure your estate is passed to those you care most about, and in a cost-effective way. Even if you currently have a will, it should generally be reviewed every five years to make sure that it reflects current federal and state tax laws, your balance sheet, the heirs you wish to benefit and your goals.”
Without a will, state laws will dictate how your assets will be distributed under the laws of intestacy. As a result, property may not pass to your intended heirs in the manner you desire, or worse yet, will pass to heirs who you do not wish to benefit.
Wills also give you the opportunity to designate important roles, with legal and financial responsibilities, providing you with the peace of mind that your affairs will be well-looked-after when you no longer can. You should ensure that people you trust, whether individuals or an experienced professional fiduciary whose job it is to take on these roles, are in them.
Executor/Personal Representative: Carries out the terms of the will and manages all the financial and legal details needed to administer the will.
- Trustee(s): At your death, last wills often create irrevocable trusts for your beneficiaries which will need to be administered and distributed by a person or professional trust company, called a trustee, who has a legal obligation to carry out the terms of the trusts.
- Guardian(s): If you have a minor child or a disabled child and there is no other surviving parent, you need to name a guardian. In the case of the minor child, the guardian will serve until the child attains the age of majority — typically age 18 in most states. If you do not name a guardian for your minor children, the state will assign one of its choice.
“In certain states, a will essentially becomes public information for anyone who wants to go find it once the probate process needed to administer it occurs,” points out Duffy. “Our Sports and Entertainment clients often have concerns about protecting their privacy, so exploring whether a revocable trust is a viable alternative to a will may make sense.”
The probate process can also be very time consuming and costly in some states. Typical expenses that can be avoided include attorney fees, court costs, and expenses for tax compliance, appraisals and executor fees.
A revocable trust, also called a revocable living trust (RLT), affords privacy and a quicker, far less expensive means for transferring property than under a will. It is established during your lifetime and can: (i) facilitate the smooth transition of asset management in the event of your temporary or permanent incapacity, and (ii) reduce or avoid court-supervised probate in the administration of your estate when you pass. You can fund your revocable trust with a wide array of assets, including real estate, bank and investment accounts, closely held business interests, contracts/mortgages/notes, automobiles/boats/planes, and other tangible personal property (such as art and jewelry). As the name implies, you can change or revoke the trust at any time during your life as long as you have the legal capacity to do so.
Importantly, a revocable trust does not explicitly create any estate tax benefits. It is a probate avoidance device. You can learn more about this and other trusts by speaking with your Merrill Private Wealth Management advisor.
Who has the power to act on your behalf?
“It is not uncommon for our Sports and Entertainment clients to have amassed significant wealth,” notes Duffy. “In those cases, managing asset transfers, whether in one’s lifetime or through an estate, in the most tax-efficient way possible may be a primary concern. This may give rise to the need for trusts.”
A trust is a legal arrangement where a trustee (either a person or a corporate entity, like Bank of America Trust Company, N.A.) holds and manages property pursuant to your instructions, for the benefit of persons or charities that you select (called beneficiaries). Trusts can provide asset protection, reduce estate taxes and create a multi-generational family source of wealth. When there is a great deal of wealth involved, heirs typically do not inherit assets outright in their own name. Instead, they inherit trust structures that will hold and manage these assets for their benefit.
Working together with your lawyer and your Merrill Private Wealth Management advisor, your estate plan might have several trusts, including but not limited to: (i) trusts that are funded during your lifetime; (ii) trusts established at the death of the first spouse for the benefit of the family in general; (iii) marital trusts established at the death of the first spouse for the sole benefit of the surviving spouse; and (iv) trusts established at the death of the second spouse for the benefit of children and grandchildren.
Any trusts established upon your passing as defined in your will or your revocable trust are called “testamentary trusts.” They only come into existence after you die. Specific examples of these trusts include a bypass trust (also known as a credit shelter trust or a family trust), a marital trust (also known as a “QTIP trust”) and a continuing trust for children or other descendants (also known as a “descendants trust”).
For many professional Sports and Entertainment figures, the idea of a power of attorney (POA) is not new. You may well have already designated certain professionals, like your accountant, attorney or business manager, to act on your behalf in particular financial and legal matters. You can define the scope of any POA:
- A limited POA, like your signatory at the closing of a specific real estate transaction so you don’t have to attend. In these cases, the POA expires as soon as the specific transaction is complete.
- A broad POA, which can include the ability to pay bills, to make investment and real-estate decisions, and to make gifts.
From an estate planning standpoint, though, POA designations end when you pass away, and the executor and trustee take over. According to Duffy, “The POA also ends if you become temporarily or permanently legally incapacitated. Should that occur, the courts may appoint a guardian to manage your property if you have not already done so. It’s therefore important to establish a durable POA, which remains in effect in the case of any subsequent incapacity and terminates only upon your passing.” The durable POA can also serve as a substitute for a revocable trust in providing for the management of property in the event of incapacity.
Caring for your health if you can’t
It’s an unpleasant fact of life that sometimes accidents or illness can render one unable to communicate or make decisions, particularly regarding medical care. Imagine the added emotional stress on your loved ones if they have to make decisions about your medical care in such circumstances.
For a more detailed overview of the basic documents you need to help manage your estate in the event of your passing or becoming incapacitated, please reach out to your Merrill Private Wealth Management advisor for a copy of our “Overview of Basic Estate Planning Documents.”
“Advanced directives were designed for exactly these situations,” says Duffy. “Making sure your wishes are known and fully understood before any kind of health care crisis can reduce everyone’s anxiety about what the future may hold.”
A living will (not to be confused with a revocable living trust) is a written statement that expresses your desires for a natural death should you fall into a permanent vegetative state with no chances of recovery. This is where you provide directions to your doctors as to whether to provide, or stop, heroic life sustaining measures like the administration of nutrition, hydration, ventilation, dialysis and medicine if there is no chance that you will recover.
A health care proxy or health care power of attorney names an agent, often your spouse or adult child, to make non-life-ending health care decisions for you, should you become incapable of making or communicating those decisions yourself. Living wills and health care proxies are often combined into a single document called an advanced directive.
Ensure your beneficiaries’ benefits
As a professional, you likely have benefits that may include life insurance policies, IRAs, 401(k)s and other types of retirement plan assets. Typically, when you initiate or sign up for these programs, you are asked to sign the appropriate beneficiary form. These forms, and not your will, govern distributions from your different policies and plans.
However, it is up to you to review them periodically to ensure they reflect your current goals. “For example, it’s not uncommon for people to forget to update their forms when their marital status changes or they have a child,” points out Duffy.
Don’t go it alone. Your Merrill Private Wealth Management advisor can help.
While creating wills, trusts, durable POAs and advance directives, your Merrill Private Wealth Management advisor and other Merrill specialists can help educate and guide you to make sure your bases are covered.
Your Merrill Private Wealth Management advisor has access to easy-to-use tools to help you organize and plan for these decisions. In particular, your Merrill Private Wealth Management advisor can share various estate planning worksheets, checklists and whitepapers that walk through the information needed so you are prepared when speaking with your attorney and tax advisor.
Merrill, its affiliates and financial advisors do not provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
Merrill offers comprehensive services, with an understanding of the unique positions of men and women in the sports and entertainment industries:
|Preserve income and assets — thoughtful planning and insurance solutions that can help protect the things you care most about — your family, business and assets|
|Personalized investment strategies that address unpredictable and/or large sporadic income streams|
|Tax minimization strategies|
|Manage everyday cash and access liquidity — help with planning for your income and cash flow needs, including expense management and budgeting|
|Help figuring out multiple income streams, compensation for use of name, image and likeness, early in career — even while in college|
|Access to Bank of America loans and mortgages — realize borrowing power to fund your needs, from buying a first home to funding unexpected opportunities (i.e., vacation home, securities-based lending, customized lending, custom mortgages)|
|Plan for a fulfilling retirement and help with understanding league-sponsored pension plan characteristics and league-specific 401(k) benefits|
|Give back to loved ones and community — our Private Wealth Services group will work with you to determine the legacy you want to create for yourself, your family and chosen causes|
|To continue the conversation, reach out to your advisor.|