Money Sense - Establishing Your Own Personal Legacy

What are the keys to a successful estate plan? Clearly, it is important to understand your goals, work with trusted advisors and choose appropriate wealth transfer strategies. Yet it is just as important to speak openly about your plans with your family and other heirs.

Ideally, before you begin discussing finances, estate planning should begin with a conversation about values. With constructive family communication, you can transfer your wealth in a way that reinforces your values, while preserving both your assets and family harmony.

Having a conversation with your heirs is especially important now. Today’s baby boomers constitute one of the wealthiest segments of the U.S. population, with an estimated $41 trillion in assets expected to pass from baby boomers to their heirs by the year 2052. If you are a participant in this massive transfer of wealth, you have the opportunity to choose an approach today that can keep family bonds strong, while maintaining tax efficiency.

Although many estate plans are built around tax minimization, other goals generally drive family decisions. When you speak with your Financial Advisor about your estate, you might want to begin with a different objective: What do you want your wealth transfer to achieve?

Establish Family Goals

Your family’s shared values can help you determine which wealth transfer strategies to utilize, and discussing them together will help you define your objectives clearly. Do you care about particular charitable causes? If so, you might consider establishing a charitable trust to support them and minimize taxes. Do you want to encourage entrepreneurship in your grandchildren? Perhaps, a trust that provides funds for starting a business would be appropriate.

Parents are sometimes unsure about the best way to share financial information with their children. A Financial Advisor can often play an important role in getting the conversation started. This could mean setting up a family meeting, or a series of meetings, to talk about the family’s financial strategy. By introducing heirs to your trusted advisors, you also help to improve communication – and assist your heirs in the receiving sound advice both now and in the future.

Choose the Right Wealth Transfer Vehicle

Once your family has discussed values and finances, you can look into which wealth transfer vehicles best suit your shared goals. The options include everything from trusts, foundations and gifting strategies, to education plans and IRA transfer strategies.

Personal trusts: Trusts can be used to take advantage of estate and gift tax exemptions while meeting family goals. Today, there are nearly four million personal trusts, more than twice as many as existed in 1997, according to Tiburon Strategic Advisors, a market research firm. Trusts can be created to fund your grandchildren’s education or entrepreneurial interests. Trusts can also be used as vehicles to provide for a spouse or a charity while also limiting gift or estate tax exposure. In addition, trusts can help you control the distribution of assets to heirs and protect assets from divorce proceedings or other unforeseen liabilities that may impact your family in the future.

Gifting and other strategies: Of course, trusts are just one estate planning tool. Other techniques include annual gifting to loved ones, direct transfer of appreciated stock or property to charitable organizations, and use of donor advised funds and foundations, to name a few. You can make gifts to individuals of up to $12,000 annually, per recipient ($24,000 for a married couple), free of gift and estate taxes. You can also make unlimited gifts for direct tuition and/or medical payments. An individual can also choose to fund a 529 college savings plan – up to certain limits – and remove those gifts from their taxable estate. Gifts to charitable organizations are unlimited and typically not subject to gift and estate tax liability. Donating appreciated property to charity will not only generate income, gift and/or estate tax deductions but avoid capital gains tax liability at the time of sale by the charity. Some lesser-known strategies involve IRA beneficiary designations. By working with a Financial Advisor, you can determine the best way to set up your IRA to let it pass to your heirs with favorable tax treatment.

The Importance of Communication

No matter what strategies and techniques you choose, it is important to keep the lines of communication open with all family members affected by your decisions. Communicating your planning rationale and the values behind it can help them understand what they should or should not expect, allowing them to prepare accordingly and be more effective stewards of family wealth.