SAFEGUARD YOUR FINANCIAL LEGACY.

Whether you are a business owner or investor, building wealth requires solid estate planning 

Guy Holman has plans to keep his business in the family.

FOUR YEARS AGO, GUY HOLMAN DECIDED TO START his own business, a mortgage company that specialized in financing commercial properties. His wife of five years, Pamela, 36, joined him in the business in 1999. So far, business is good--the company had $1 million-plus in revenues last year--and the couple wants to keep it that way. They have given serious thought to the survivorship of the family-run business.

"Strategically, the short-term plan is that in the event of my demise, my wife would run the business and vice versa. There is a buy-sell agreement in place between our shareholders and us," says the 33-year-old Holman. Such an agreement outlines how remaining business partners can buy out a deceased partner's interest. "Because we don't plan to work forever and assuming that my son, Avery, 12, has an interest in taking on the business, the long-term strategy is to slowly start transferring shares out of our beneficiary interests, which we keep inside of a living trust." Created during a person's lifetime, a living trust holds property--cash, securities, real estate and other assets--that is eventually transferred to a trustee on behalf of the grantor's beneficiaries.

The Holmans also have put in place key-man life insurance policies, so that in the event of either's death, $500,000 will be paid back into the company to replace any revenue shortfall. "A key-man policy provides working capital to a company as transition money," he explains. The couple also has $500,000 each in term life insurance. The Holmans liquidated funds in their 401(k) accounts from previous employers to come up with more than $50,000 in startup capital. They are now looking into tax-deductible, tax-deferred retirement plans for the self-employed, such as Keoghs and SEP-IRAs. The former lets you sock away 20% of earned income or no more than $35,000 a year; the latter allows owners to contribute up to 15% of income, or $30,000 per year.

It is still too soon to tell if Holman's 12-year-old son will follow in dad's footsteps, although he was a summer intern in the business doing clerical and office work. The Holman family understands the importance of DOFE principle No. 10, which is to ensure that your wealth is passed on to the next generation.

Of course, the transferring of wealth requires solid tax and estate planning. To help you safeguard your family legacy, start with these basic planning tools (see "What the New Tax Law Means to You," this issue):

* Assign a power of attorney. Your estate should include measures to protect you and your assets if you're no longer able to manage you affairs. Power of attorney is a document that names an agent, someone who can take charge by signing checks, paying bills, and making other financial decisions on your behalf. Also, consider appointing a relative, attorney, or accountants as executor.

* Estimate your estate, estate tax, and probate costs. What will be the value of your property when you the (e.g., equity investments, real estate, and personal property). What debts will you owe when you die (e.g., mortgage)? What deductions will be taken from your estate (e.g., administration costs and marital deductions)? Starting in 2002, the amount you can pass to heirs tax-free increases to the first $1 million of your estate and the top tax rate is 55% on amounts greater than $3 million, compared to the current estate tax threshold of $675,000 and a top tax of 55%.

* Figure out how your property will distribute in a tax-efficient manner. Many stock brokerage accounts are registered as joint tenants with rights of survivorship. This title results in the immediate transfer of the account to the surviving joint owner upon the death of the other tenant. Aside from these accounts, your assets are distributed according to beneficiary designations (e.g., life insurance, retirement plans, and annuities).

* Create a trust. While wills delineate what part of your estate your loved ones get, they are virtually always subject to probate court, which can take nine months to two years. A living trust saves the expense and time of probate. A revocable trust means you can change it; irrevocable means you can't touch it. Testamentary trusts are alternatives to living trusts. They become legal only when you are laid to rest. Some people use such trusts to isolate funds--for instance, property for your children from a first marriage.

* Review your life insurance policies. Before you choose an amount for an insurance policy, you should take into account how much income you would like to leave behind in the event of your untimely death. A $100,000 policy may not be enough for a young spouse with a mortgage, children, and credit card bills. In general, financial experts say you should have five to eight times your current income in insurance coverage.

Once you have made a net worth statement (assets minus liabilities), consult an estate-planning professional--not an insurance representative.

DECLARATION OF FINANCIAL EMPOWERMENT

From this (Jay forward, I declare my vigilant and lifelong commitment to financial empowerment. I pledge the following:

1 To save and invest 10% to 15% of my after-tax income

2 To be a proactive and informed investor

3 To be a disciplined and knowledgeable consumer

4 To measure my personal wealth by net worth, not income

5 To engage in sound budget, credit and tax management practices

6 To teach business and financial principles to my children

7 To use a portion of my personal wealth to strengthen my community

8 To sup sort the creation and growth of profitable, competitive black-owned enterprises

9 To maximize my earning power through a commitment to career development, technological literacy and professional excellence

10 To ensure that my wealth is passed on to future generations