Let's face it: estate planning is not known for its high fun factor.
Nevertheless, it's essential to develop a comprehensive estate plan early enough to avoid unintended outcomes and unpleasant surprises for your loved ones.
Many wealth owners put off their plans for various reasons, and we get it.
Although the event is inevitable, it may not feel near, some arrangements may already be in place, and other issues in the here and now may seem more important.
The topic can also be intimidating and uncomfortable. Who wants to set a meeting discussing what happens when they’re no longer here?
So what can you do to enhance your plan?
In this post, we will guide you through five areas that can significantly improve your estate planning.
The estate planning process
Let's start with some estate planning basics. It requires a structured estate planning process that starts early enough and is updated regularly.
Combined with wealth planning, the process ensures control over your wealth during your lifetime and prepares for a smooth generational wealth transfer.
The inventory
In this first step of the estate planning process, you list your wealth and liabilities. The target is to get an idea of the net value of your estate and how the various asset classes will be transferred.
Your inventory should include all physical and financial assets, credits, and debts. They are then allocated to specific asset class categories for a better overview and specific planning areas.
Contingent wealth such as life insurance and retirement accounts are also listed. Ownership for all items should be documented and clarified. If there is joint ownership, its impact needs to be taken into account.
Your family
Next to consider is your family's needs and define a vision for their life after your lifetime.
- What will they need in terms of wealth?
- What's appropriate in your opinion?
- How should the family's future lifestyle look?
- If you have young children, you should also consider guardianship and protect them on their way to becoming adults.
- Blended families require a specific assessment since applicable inheritance laws may not be straightforward.
- If you own a family business, you should pay special attention to whether and how the family should continue controlling the company and who should lead the business.
All of the above are not unilateral decisions but thoughts that should be discussed with your family. Why?
You may have the best intention with your estate plan, but your family may perceive your arrangements entirely differently.
Sharing your plans and inclusive decision-making assist in managing expectations, preventing conflict and litigation between the beneficiaries.
This hopefully gives you peace of mind and assurance of making the right decisions.
Estate planning options
Before you implement specific options and tools, some restructuring may be necessary. Clear ownership of wealth facilitates a smooth transition, so it's advisable to avoid complicated ownership structures.
The assessment of options occurs in light of liquidity planning and tax planning to achieve a balanced combination of estate planning vehicles according to assets and beneficiaries.
It also plans for life events such as marriage, divorce, and separation.
Which tools are ideal for you depends on your circumstances and objectives. With clarity about assets and the targeted outcomes for your family, the job will be easier.
We cover some tools below, and in many instances, a combination of them will deliver lasting results.
The envisaged outcome
The ideal outcome puts you in control of what happens with your wealth during and after your lifetime. It ensures that your wishes are followed accordingly, and the beneficiaries are prepared for inheritance.
Furthermore, it should reduce probate procedures to the absolute minimum since they are often lengthy and costly.
Finally, multi-jurisdictional estate planning considers specific local laws and procedures and how they interact with each other.
Estate planning and wills
If you want to seize the estate planning opportunities of your legal environment, a will ensures that things are handled predictably and smoothly. It can prevent disputes and benefit beneficiaries accordingly.
It's advisable to draft a will early enough and deposit it for straightforward access. A will can be a clear option to solve things well in advance.
Formal requirements
Although we do not recommend drafting a will on your own, in many jurisdictions, this is possible.
In Switzerland, you can handwrite a will or draw it up as a public will. In addition, it can be written orally as a so-called emergency will.
The handwritten will makes it possible to make independent arrangements about the estate.
- It’s important to note that you need to write it entirely by hand and include the exact date.
- In the case of wills with different dates, the most recent date will be decisive.
- The same applies if any questions should arise around the capacity to judge at the time of writing.
- Finally, the will must be signed.
The public will is notarized in the presence of two witnesses.
- The witnesses cannot be your relatives and cannot be beneficiaries of the will.
- The content of the will itself is not published.
An oral will can be made in emergencies when a notary cannot be present or a record cannot be made.
- In this case, two witnesses are required to draw up and sign the will.
- It is then deposited with a court.
Under Swiss law, you can amend and correct your will later, subject to formal requirements. A will can also be revoked at any time.
This can be done in writing, by destroying the original document, by implication, or by the alienation of assets mentioned in a will.
The contract of inheritance
If you wish to achieve a comprehensive settlement and the associated clarity for your heirs already during your lifetime can conclude an inheritance contract with them, which must be publicly notarized.
Here, Swiss law allows various design options. In this way, you can assure heirs of their beneficiary status free of charge or against compensation.
The heirs themselves can waive their rights, either gratuitously or for consideration.
The contracting parties can also cancel the inheritance contract, although unilateral changes are limited.
The executor of wills
Under Swiss law, you can also appoint an executor for your will. This can be a trusted person or advisor.
It’s often a relief for grieving relatives, as they don’t have to deal with formalities and become part of a more manageable process.
The executor can have wide-ranging powers to administer the estate and distribute it following your specific wishes. This is balanced by legal obligations to perform the assigned tasks carefully and meticulously.
International scenarios
Wills are also helpful in tackling international scenarios. If you have more than one nationality or live in a foreign country, you should consider a choice of law.
This so-called profession iuris allows you to determine the applicable law for your estate.
If you own assets in various jurisdictions, you may want to consider having more than one will. In particular, if real estate is involved, this may facilitate a less complicated transfer of wealth by splitting the estate.
Whenever you change residence, it's time to review an existing will since different laws and procedures may apply.
The same applies to changes in your marital status since you may not want to keep your ex-spouse as a beneficiary after the divorce.
Living wills
The good news is that statistically, we all will have more time on the planet than past generations. With an advance directive and a living will, you retain your right to self-determination even if you can no longer exercise it yourself.
You can appoint a person to take care of you, your assets, or your legal representation. Another critical point is to specify which medical measures you consent to in the event of your incapacity.
Also, here specific formal requirements may apply depending on your jurisdiction.
Estate planning and trusts
A trust is a legal relationship that comes into existence when the settlor based on a trust deed transfers ownership of certain assets to a trustee to hold and manage them for the benefit of designated beneficiaries.
- Trusts are the most flexible instruments for estate planning and asset protection.
- You can establish a trust either by a legal arrangement inter vivos or by a disposition upon death.
- Even though it is similar to a foundation, a trust has no own legal personality.
- In simple terms, the trustee holds the assets on a fiduciary basis and is the trust assets' legal but not beneficial owner.
The trust details are specified in the trust deed and regulated by the provisions of the applicable law.
Types of trusts
Given the variety of trust options and jurisdictions, listing all trust types would go beyond the scope of this post.
So, we will focus on the most significant difference between revocability and irrevocability in the context of estate planning and trusts.
A revocable trust allows you to terminate the trust at any moment and obtain ownership of the trust assets.
- Only after your lifetime the trust becomes irrevocable and will be administered according to your wishes.
- With a revocable trust, you keep all options and flexibility, although you may not achieve asset protection, and you may still have to pay taxes on the trust assets.
An irrevocable trust leads to an irreversible contribution of assets to the trust, and you give up control over such assets.
Usually, you'll not be in a position to change or terminate an irrevocable trust, but you will achieve asset protection. Creditors may not be in a place to satisfy their claims vis-à-vis the settlor by seizing the trust assets.
Benefits of trusts
Trusts allow for the consolidation of assets and often avoid probate procedures regarding the assets held under the trust.
This can simplify and accelerate the transfer of wealth to the beneficiaries in a private and discrete process.
Over generations, they also allow for wealth preservation since beneficiaries may be entitled to a specific benefit but not ownership of the trust assets.
Furthermore, they can ensure the maintenance of younger children without having to involve authorities.
Let's take the shares in a family business company or art and collectibles as an example. The direct transfer of ownership may result in the alienation of the asset by the beneficiaries, while under a trust structure, they may not have the right to dispose of the asset.
For art and collectibles, a trust may also facilitate adequate administration of an asset where beneficiaries may not have the interest or experience to hold it in custody.
A specialized trustee can control and administer the asset following the settlor's wishes.
Issues to consider for estate planning and trusts
No matter what type of trust you are considering, you must understand every detail of the transaction, documentation, and legal consequences.
Furthermore, a trust should not be seen isolated but integrated into your overall wealth and estate planning.
You should select your trustees carefully since you'll enter into a long-term relationship, and the trustee will also be responsible for your wealth after your lifetime.
If you envisage several trusts, diversification in terms of trustees and jurisdictions may enhance risk mitigation.
Estate planning with life insurance
Life insurance is often overlooked in estate planning, but it’s the Swiss army knife of all available tools, in our opinion. The most significant advantage of life insurance is that it's understood globally. Let’s assess some life insurance options and their benefits.
Private placement life insurance
The technical term is a single premium unit-linked whole-of-life insurance. In plain language, it means that the policyholder transfers financial assets to the life insurance company.
And with the decease of the insured person, those assets will then be transferred to the beneficiaries.
The beauty of private placement life insurance is that you can access a broad range of possible investments.
You can invest in alternative investments, and some insurance carriers even allow you to hold real estate and cryptocurrencies.
Usually, there is only a minimum guaranteed death coverage, so while you have the full upside potential, you keep total exposure to eventual financial markets’ downside movements.
Something you would, though, also have without the specific life insurance policy.
However, you have all flexibility to withdraw assets, change beneficiaries, and combine the life insurance policy with other estate planning tools such as trusts and foundations to achieve sophisticated and individualized results.
Often private placement life insurance offers tax-efficient income and capital gains accumulation.
Since assets are held under the life insurance contract by the life insurance company and not by the policyholder, there can be preferential access to double tax treaties.
Custody of the assets can remain with your wealth manager. You can even appoint it as asset manager of the funds held under the life insurance policy and implement your individual investment strategy.
The focus here is on investment and growth opportunities. Fees are relatively moderate since the insurance carrier offers only a minimal guarantee—all with the total flexibility of withdrawals or complete surrender.
Universal life insurance
With universal life insurance, a high death benefit is a crucial element. Such estate planning with life insurance has been most popular with Asian wealth owners but is meanwhile offered in many regions.
In basic terms, this strategy aims at the highest possible amount for the beneficiaries at the insured person's death.
Suppose an entrepreneur wants to transfer the family business to one family member but does not have enough liquidity to compensate for other family members.
In such a scenario, universal life insurance can provide the needed liquidity to distribute family wealth equally.
Wealth managers offer premium financing opportunities against pledging the life insurance policy to enhance the setup further.
You can also plan for liquidity to settle inheritance taxes, particularly if you intend to transfer non-financial assets to your estate plan’s beneficiary.
Variable universal life insurance
This is a combination of the above two types of life insurance. You will get a high death benefit and flexibility in the management of the underlying assets.
Again the entire setup can be customized to specific needs and combined with other estate planning tools.
The benefits of estate planning with life insurance
We have mentioned many of them but want to highlight that simplification works best in complex scenarios.
Trusts can be the policyholder and beneficiary of a life insurance policy, and there are specific reasons for it, such as asset protection or tax efficiency.
In all other instances, policies are straightforward and cut off part of the edge of complexity in international estate planning.
Estate planning and taxes
As we recently covered various options for estate planning and taxes in a blog post about inheritance tax planning, we will keep this part short.
Taxes are vital to consider, and estate planning tax strategies complete the framework of the individual arrangement.
Recommendations for approaching tax planning
You should not base your estate plan merely on tax considerations. And it would be best if you only relied on legitimate inheritance tax planning techniques.
Furthermore, it would help if you planned for liquidity to cover taxes. In particular, if you will transfer mainly non-financial assets, beneficiaries may run into tight liquidity situations.
Also, for estate planning tax strategies, we advise keeping things simple. A comprehensive view orchestrates the variety of options and ensures the diversification of tools and providers.
With regular reviews, you can react to eventual changes and adapt your plans. We don’t believe in testing new approaches but in legitimate and straightforward solutions.
In Switzerland, tax rulings provide certainty on how inheritance taxes will be applied.
This differs from many other countries in terms of predictability. That’s why keeping things simple is so important if you don’t have your tax authorities’ confirmation.
Estate planning strategies
In practice, we often see a siloed approach to estate planning. Sometimes the focus is on specific assets, individual beneficiaries, taxation, or a given vehicle.
In such scenarios, there’s the risk that the setup misses out on covering essential areas.
Estate planning strategies should be comprehensive to deal with all relevant fields and simplify the transfer of wealth.
A thorough analysis lays the foundation for individual arrangements and unifies complex concepts for wealth protection and family provision in a practical context.
Focus on estate planning
The focus on estate planning is paramount. Although tax planning is essential, all too often, wealth owners mainly concentrate on the tax consequences.
However, reducing inheritance taxes should complement estate planning.
Tax laws may change over time, and thus the main target is wealth transfer and preservation over generations.
Starting early with estate planning
To meet your short-term and long-term goals, you need to start early with estate planning. Keeping your family financially secure is an ongoing process that develops over time.
You can start with some of the above right now, such as preparing the inventory and discussing estate planning with your family.
Other components of your estate plan need to be analyzed precisely and carefully. That requires time and consideration and, in the absolute majority of cases, external support from an expert.
Regular reviews
Even if your situation does not change over time, laws and taxes may. Therefore regular reviews of your estate plan guarantee that your arrangements are still synchronized with your objectives.
Estate planning is no one-off exercise but an ongoing evaluation of circumstances and options. Your needs may change with life phases, and what has been most important five years ago may now have a different significance.
Ongoing fine-tuning of your estate plan will enhance it and enable optimal alignment with your needs and circumstances.
FREQUENTLY ASKED QUESTIONS
How does estate planning differ for blended families?
Estate planning for blended families can be more complex due to the presence of stepchildren, ex-spouses, and multiple households. It's crucial to clearly define your wishes regarding the distribution of assets to avoid potential disputes.
This might involve setting up trusts for specific family members or allocating certain assets to your current spouse while ensuring that children from a previous marriage are also cared for.
It's also important to consider the impact of inheritance laws, which may not be straightforward in the case of blended families.
For instance, some jurisdictions may not automatically recognize stepchildren as heirs, so explicit provisions may need to be made for them in your estate plan.
Regular communication with all family members about your estate plan can help manage expectations and prevent disputes.
How can life insurance be used in estate planning?
Life insurance can be a versatile tool in estate planning. It can provide liquidity to settle inheritance taxes or compensate family members who may not inherit a family business.
Private placement life insurance allows for a broad range of possible investments, while universal life insurance focuses on providing a high death benefit. Variable universal life insurance combines these two aspects.
The choice of life insurance depends on your specific circumstances and objectives. For instance, if your estate consists mainly of illiquid assets like real estate or a family business, a life insurance policy can provide the necessary funds to pay inheritance taxes without selling these assets.
Similarly, if you want to ensure that all your children receive an equal share of your estate, but only one child is involved in the family business, a life insurance policy can provide a cash inheritance to the other children.
What are some considerations for estate planning in international scenarios?
International scenarios can add complexity to estate planning. If you have multiple nationalities or assets in various jurisdictions, it's essential to consider the laws of each country.
You might want to have more than one will, especially if real estate is involved, to facilitate a less complicated transfer of wealth. Residence or marital status changes should also prompt a review of your estate plan, as different laws and procedures may apply.
For instance, some countries may impose inheritance taxes on worldwide assets, while others only tax assets within their borders.
Similarly, some countries recognize common-law or same-sex marriages, while others do not. These differences can significantly affect how your estate is distributed and taxed.
Therefore, seeking advice from professionals familiar with each relevant jurisdiction's laws is crucial.
Updated 27-07-2023