We spend most of our lives planning. Some of the things we plan, such as what to have for dinner or the route we'll take to work, are so trivial they require little thought. Other things, such as a family vacation, the correct bid for a big project, or purchasing a new home, require a great deal of thought and planning. All day, every day, we plan. Yet, many of us fail to plan for one of the most important tasks of all – what will happen to our possessions and electrical business once we're gone.
There are many excuses for not facing this task. Some simply believe that once they reach those golden years there won't be enough left to plan for. Others believe their heirs can work out the details. Still others simply aren't willing to face their own mortality. But the biggest problem for the electrical worker who has been in the electrical contracting business for 35+ years is a lack of planning for retirement or the transfer of assets.
Planning for the distribution of your estate isn't necessarily difficult, but it does require serious thought. Here are 10 steps to help you with this most important planning process.
Step 1: Assemble Your Estate-Planning Team
One of the most important decisions you'll make regarding your estate is who will guide you through this process. This team often includes four individuals: an attorney, a tax professional, an investment professional, and you. Choose professionals in whom you have utmost confidence, and don't be afraid to ask questions. It’s very important that these people have experience working with electrical contractors, because you want them to be familiar with the industry and understand its nuances.
Step 2: Determine Your Objectives
Estate planning truly focuses on planning for life―your life and the lives of your heirs. Estate planning involves financial and tax matters, but it also involves helping ensure family members are secure. Another important aspect of determining your objectives is making sure that if you do pass away, your business continues to run smoothly. Determine if there are family members that are fit to run your business so that the family legacy lives on. Too many successful electrical contracting businesses have gone broke after the owner passed away and a clueless son or daughter tried to take over the business. Discuss your objectives with your team, so they can suggest appropriate plans.
Step 3: Create a List of Your Assets
To help you create a proper estate plan your team must have an accurate list of the assets you own. This includes your company retirement plan and any equipment that are tangible assets at your company, such as trucks, machines, and the like. Ask your attorney, investment professional, and accountant if he or she can provide a document that will help inventory your assets.
Step 4: Minimize Administrative Details
Settling an estate can involve a barrage of paperwork. Consolidate your assets, and keep a detailed inventory of these items. This will give your survivors the information needed to re-register any securities.
Step 5: Draft a Will
Step 5: Draft a Will A will is a written document that explains how you want your property distributed once you pass away. It’s crucial because it allows you to control how and to whom your assets are distributed. If you die without one, state law will govern how your assets are distributed. A will is absolutely necessary if you have children who are still minors because it allows you to designate a guardian.
Once you have a will, don't file it away and forget it. Take it out periodically and review it. Just as changes to the NEC require you to make changes in your design and installation practices, changes in your business necessitate changes in your will.
Step 6: Reduce Your Probate Estate
Probate is a process in which the courts carry out the provisions of your will. Your probate estate includes all assets titled in your name when you die; it doesn’t include life insurance policies or jointly owned assets. Unfortunately, this process typically takes nine months to two years to complete and can cost between 2 and 5% of the value of the estate. In addition, the records are public, so anyone can access this information. The last thing you want is to have your family going through probate while trying to keep your electrical firm running. Although it may be impossible to avoid probate entirely, you may be able to keep the majority of your estate from probate and, thus, simplify things for your heirs.
Step 7: Determine Your Taxable Estate
It's important to distinguish between your probate estate and your taxable estate. The latter consists of the value of your gross estate (the fair market value of all your assets and electrical firm) less any deductions. The estate tax is imposed by the U.S. government on the assets or property you transfer to others when you die. The Tax Relief Act of 2001 has lowered estate tax rates, but they can still take a hefty chunk out of your estate.
Step 8: Take Advantage of Estate-tax Exemptions
Under the current law, you can transfer up to $1.5 million in assets free of federal estate taxes upon your death. For example, if Ed the contractor, the owner of a very profitable electrical company, passes away in the year 2005 with a taxable estate valued at $4.5 million, his heirs will owe estate taxes on the amount of Ed’s estate that exceeds $1.5 million. Thus, Ed’s taxable estate will be $3 million. The amount of the exemption increases to $2.5 million in 2006 and $3.5 million in 2009.
Step 9: Hope for the Best, but Plan for the Worst
No one likes to think about the possibility, but what if you become unable to manage your business or personal affairs? A durable power of attorney allows you to designate who will manage your financial affairs should this happen. This person is known as your attorney-in-fact. In addition to a durable power of attorney, consider establishing a health-care directive, or proxy. This allows someone to make certain health-care decisions for you if you’re unable to do so yourself.
Step 10: Protect Your Assets With Insurance
Medical expenses in your later years can destroy a lifetime of work. Even worse, you could be forced to use your children's or family's resources. Life insurance can help. For example, life insurance can protect your survivors from the loss of your income and can provide cash for your family to help pay taxes and/or expenses when settling your estate. You should support association health plans (AHPs) that will allow business owners like yourself to purchase health insurance through organizations like IEC and NECA.
With these 10 steps and a team of estate-planning professionals to guide you, you’re now ready to begin planning for the distribution of your estate. Remember, don't be afraid to ask questions along the way. Your team can provide invaluable information and insight.
Estate planning is a serious task that includes difficult decisions, but the results are well worth the effort. By taking time today, you’ll determine how your possessions are ultimately distributed once you’re no longer here to manage them. Don't put off this process! After all, you're not just planning trivial matters―you're planning for the future success of your family and your electrical business.
Abercrombie is a financial advisor with Edward Jones Investments, Dallas and an associate member of the IEC Dallas chapter.