Estate planning is an important and everlasting gift you can give your family. And setting up a smooth inheritance isn’t as hard as you might think.1
—Suze Orman, finance author
Frank Slootman is one of the top CEOs in Silicon Valley. In 2003, he took the helm of Data Domain, which was a struggling storage startup. But he quickly transformed the company and growth surged. In 2007, he took the company public, and it was eventually sold to EMC.
After this, Slootman became the CEO of ServiceNow, a pioneer in the SaaS IT help desk market. He again made significant changes to the company. By 2012, he took ServiceNow public2 and the value of the stock would eventually hit $109 billion.
We would then go into semi-retirement. But this did not last long. In 2019, he became the CEO of Snowflake, a fast-growing online database provider. But he was able to accelerate the ramp even further and pulled off an IPO in September 2020. It was the largest software deal in history, as the company raised $3.4 billion.3
Needless to say, Slootman has accumulated substantial amounts of wealth. By 2022, Forbes.com estimated his fortune at $2.2 billion.
But Slootman has also been smart with his estate planning. He not only wants to provide for his family but also various charities. To this end, Slootman has established a trust.4
Granted, estate planning is something that people often avoid. No one wants to think about their death, right? Of course not. But despite this, estate planning is too important to ignore.
In this chapter, we’ll look at the fundamentals and the different strategies.
Why Estate Planning?
By his mid-20s, Tony Hsieh was already a multimillionaire. During the 1990s, he sold his Internet startup, LinkExchange, to Microsoft for $265 million. He would then go on to found online shoe retailer Zappos. At first, the startup would struggle, but Hsieh found ways to ramp the growth. In 2009, he sold the company to Amazon for $1.2 billion.
Unfortunately, Hsieh’s life would ultimately come to a tragic end. In late 2020, he died in a fire at his home in Connecticut. He was only 46 years old.
Estimates of his wealth were over $800 million.5 Yet Hsieh did not leave a will. As a result, there were a myriad of lawsuits. The resolution of his estate could eventually take many years.
This terrible incident shows the importance of estate planning. Without legal documents – like a will or trust – there is likely to be higher expenses as well as a longer process to resolve matters. This can actually reduce the value of the estate.
You can provide instructions about how to handle your medical preferences. For example, if you are incapacitated, you can designate someone to make decisions on your behalf. Or you can specify how you want end-of-life care.
You can name those who you trust to take care of your children.
You can use legal structures to help reduce the potential tax burden.
You can effectively gift assets, such as to your loved ones or favorite charities.
With a trust, you can maintain privacy of your financial assets.
If anything, estate planning can mean less stress and problems for your family when you die. If not, the government will make the decisions – and they may not necessarily be what you intended.
Will
A will is a legal document that allows you to distribute your assets to your heirs. You can also specify guardians for your minor children.
Each state has rules about the validity of a will. Usually, you will need several witnesses to be present and attest to your signing and dating of the document.
In the will, you will designate an executor. This is the person who will carry out your wishes. This can certainly be a major undertaking. So, make sure to talk to the person who you want to become the executor. If you have a complex estate, you may name an advisor to help. Or you can even have a bank or trust company manage the will.
When you die, your will goes through a judicial process called probate (assuming the value of the estate meets a certain level, according to your state law). This is where your will is validated. Depending on the estate, the process can take over a year and be expensive. This is why you might want to consider naming beneficiaries for certain assets and setting up a trust (we’ll cover these topics later in this chapter).
After probate is completed, your will is filed with the court. This means the document will be publicly available. This is why we know about the estate plans of famous people.
David Packard, the co-founder of Hewlett-Packard, died in 1996. In his will, he left a large portion of his $6.6 billion fortune to the David and Lucile Packard Foundation.6 The organization currently provides support for causes like climate change, affordable healthcare, and STEM education.
Regardless if you are diligent with estate planning, your will may not account for all your assets. For this situation, you can have a “pour-over will.” This means that these assets will transfer to your trust.
Healthcare Documents
When it comes to healthcare, there are two main types of legal documents. First of all, there is the advance health-care directive. This is for your end-of-life wishes, such as for whether to continue life-sustaining measures (an example is to not use a respirator). You should provide the advance health-care directive to your family but also your doctors.
Next, there is the durable power of attorney. This is where you name someone to make financial or health decisions on your behalf when you are incapacitated. For example, they can pay your bills, sign legal documents, and so on.
No doubt, you should spend time on who you select for this role. Such a person will have lots of power.
Beneficiaries
A simple technique for estate planning is assigning beneficiaries for assets like bank accounts, brokerage accounts, 401(k)s, and insurance policies. This means that – on your death – the assets will transfer directly to the persons you name. There will be no probate.
You should also set forth contingent beneficiaries. This is for if the primary ones are no longer alive. If not, the assets will actually windup in your estate and will be subject to probate.
When you fill out the form for your beneficiaries, you will write their name, date of birth, the relationship to you, and the contact information. You may even be able to divide the assets among different beneficiaries.
What about your employee stock options and equity? The stock plan will indicate if you can name beneficiaries. Ask your HR representative for information about this.
Trusts
A trust is a common legal structure for estate planning. It means that a trustee will hold assets on behalf of a beneficiary or beneficiaries.
If properly set up, a trust can avoid probate. There are also potential tax advantages – this is, if you establish an irrevocable trust. With this, you will no longer have access to your assets. The transfer will be final.
Privacy: Your trust does not become part of the public record.
Control: There is much flexibility with trusts. For example, you can distribute assets to your heirs while you are alive. Or you can place conditions on the assets, such as an heir needs to finish college to get a certain amount of money.
Asset Protection: A trust can provide protection against creditors.
There are many types of trusts. But the most common is the living trust or revocable trust. This means you retain control of your assets while you are alive. While this means you do not get tax benefits, there are certainly other important advantages. At any time, you can change the trust – say to add assets or take them out – or terminate it. A living trust is also generally affordable to establish.
Estate Taxes
The estate tax applies to those who have substantial amounts of assets. For 2022, the IRS requirement is that they must exceed $12,060,000 for an individual and $24,120,000 for a couple (these amounts exclude the debts of the estate). Of course, very few people pay the tax. In 2019, there were only 2,570 that did so, and the total amount owed was $13.2 billion.7 The largest amount of the assets were in publicly traded stock.
By January 1, 2026, the estate tax will revert back to the levels of 2017. This will be $5,490,000 for an individual and $10,980,000 for a couple.
Keep in mind that some states have estate and inheritance taxes. They also may have much lower minimum asset requirements.
In other words, it is worth evaluating the use of trusts to help reduce the taxes. There are other strategies, such as gifting. This takes assets out of your estate.
Determining the value of an estate can be challenging. This is especially the case if there is private stock, real estate, or other private interests. The estate may need to hire valuation experts. The valuation of the estate also must be either for at the time of death or six months later.
You and your spouse can each give up to $15,000 in gifts – each year – to family, friends, or charitable organizations. The recipient usually does not owe any taxes and there is no need to report the gift to the IRS (the exception is if the gift came from outside the United States).
If a gift exceeds the $15,000 annual limit, you will need to report this on a gift tax return or Form 709. This will lower the amount you can exempt from your estate tax threshold.
While gifting assets is a good strategy, there are drawbacks. For example, you may not want to have your children to have access to large sums of money. In this situation, you can set up an irrevocable trust and have your children as beneficiaries. You can then place restrictions on access to the money. You might allow access for when they reach a certain age or if they meet a milestone, like attending college.
There is an exception to the $15,000 annual limit. You can make unlimited payments to a medical or educational institution for others. This is so long as this is for qualified expenses, such as medical bills or tuition.
When you gift an asset like stocks or bonds, the recipient will get your cost basis. This can mean significant tax consequences if there is a sale. For example, suppose you gift 100 shares in Cool Corp. to your daughter and your cost basis is $1. But the current stock price is $20. If your daughter sells Cool Corp., the gain that is subject to tax will be $1,900 (this is $20 multiplied by 100 minus $1 multiplied by 100).
However, if the 100 shares are distributed when you die, there will likely be “stepped up basis.” This is the current value of the stock. In our example, this means that the cost basis is $2,000 and no tax would be owed.
Can you gift stock options or restricted stock? For most plans, this is not allowed.
Another common strategy is to donate appreciated stock to charities. By doing this, you will avoid capital gains tax. This also means the impact of the donation is higher. Besides having no tax, there is the potential for continued capital gains for the charity. Finally, you will be eligible for a deduction for the donation. This is up to 30% of your adjusted gross income.
Then, does it make sense to donate stock that is at a loss? The answer is no. It would actually be better to sell your stock – and get the capital loss – and then donate the cash.
Insurance
Life insurance can be a useful tool for your estate planning. This is especially the case if you have a spouse or children. If you die, you want to make sure they have enough financial resources to continue their standard of living.
A general rule-of-thumb is to have the death benefit – which is the amount paid to your beneficiaries – at least ten times your income. But of course, everyone’s situation is different. What if you have a lot of debt? Or you want to make sure you have enough money for college for your children?
Insurance companies do have online calculators to make estimates. You can also seek advice from a financial planner or insurance agent.
Term Insurance: This is for a fixed period of time, say 20, 25, or 30 years. This is pure insurance since – when it expires – there is no more coverage or cash value. Purchasing a new policy will usually be at higher premiums. This is why you want to make sure the duration of your policy is long enough. One approach is that it should last for the number of years that your youngest child will reach age 18.
Permanent Insurance: This includes whole life, universal life, variable life, and variable universal life. These policies provide coverage for your entire life, so long as you maintain the premium payments. There is also a cash value. This is the part of your premiums that grow tax-free. Depending on your policy, this may be the result of interest or even stock investments. You can borrow against the cash value, or surrender the whole amount, which can result in hefty fees.
In many cases, term insurance is the right one. It has the most coverage for the price.
However, there are cases where a permanent policy makes sense (note that you can purchase a term policy that converts into permanent insurance). For example, you might have a child that has special needs who requires life-long support. Or a permanent insurance policy can be a way to pay for estate taxes. This is so long as you use an insurance trust.
As your wealth grows, you could be vulnerable to lawsuits. Simply put, your auto and homeowners’ policies may not be sufficient protection. Because of this, you might want to consider an umbrella policy. This is often for those with net worths over $2 million.
Digital Assets
For your estate, a large proportion of the value could be from digital assets like crypto, PayPal accounts, NFTs, domain names, and so on. Or some of the assets may have sentimental value, such as your online photo albums on your smartphone.
So, what happens to these assets when you die? It depends on the laws of your state. But it is a good idea to use a vault to itemize your digital assets, indicate the locations of any documents, and passwords. You can provide access to your heirs and include the details in your estate documents.
You might think that keeping your estate planning documents in a safety deposit box is a good idea. However, this may cause more problems. Keep in mind that your heirs may need a court order to access it – which can be time-consuming.
Updates and Advice
The laws and regulations of estate planning change frequently. Of course, they can be very complex. As a result, it is usually a good idea to hire an expert. This person is usually a licensed attorney.
You should also periodically review your estate plan. This is especially the case if there have been major life changes, such as a marriage, the birth of a child, divorce, and so on. Some of the biggest problems with estate planning are due to not making the necessary changes in your life.
Finally, it is important to communicate. When it comes to estate planning, there is always the risk of causing problems with your family. Some may feel left out or even cheated. So as much as possible, try to get a sense of how your family may feel.
Conclusion
When it comes to estate planning, the best time to start is now. Having a will, the necessary healthcare documents, and the right beneficiaries’ designations can help to avoid many problems. You might also want to explore getting a trust as well as a digital vault. Then there is life insurance, which can be essential for making sure you provide for your family.
Okay then, we are now at the end of the book. We have certainly covered a lot. But do not feel overwhelmed. Again, you can use this book as a reference. When you have a certain issue, you can go to the particular chapter for some help.
You should also seek professional advice. Financial matters are challenging, and you do not want to make any major mistakes. A professional advisor can be an invaluable guide.
So then, good luck on your tech journey!