Estate plan will finance family’s future

Amid complex financial environment, an estate plan is essential to safeguard wealth

You’ve worked hard to build your wealth and provide for your family. To be confident that the legacy you envision will become a reality, it’s critical to establish and maintain an estate plan. This is especially true in today’s challenging financial environment, where tax laws can change from year to year, often with dramatic effect on a complex estate. Together with your tax and legal professional, let’s explore the optimal strategic options for your situation and develop an estate plan to help ensure your family’s future will be protected.

The financial security of your family depends not only on how you manage your wealth today, but also on how it will be managed and maximized in the future. It involves preserving your estate to the greatest extent possible for your loved ones and for wealth to be transferred according to your wishes when the time comes. Let’s take a look at a few of the essential core elements of any estate plan:

• A will. Your last will and testament directs the distribution of much of the property you own upon your death. (Some assets pass outside of a will based on operation of law or titling, such as a joint account with rights of survivorship or an IRA through a beneficiary designation; for this reason, correct titling of assets is essential.) It also names an executor for your estate and guardians for any minor children.

• Advance medical directives speak for you should you become incapacitated. A health care proxy appoints an individual to make medical decisions for you if you are unable to communicate. A living will states your wishes with respect to lifesustaining medical treatment.

• Power of attorney (POA). This authorizes someone to make business or legal decisions on your behalf. You can provide that your power of attorney is effective immediately upon signing or only in the event of your incapacity.

Reduce your taxable estate through gift giving

For high and ultra-high net worth individuals, a common objective of an estate plan is to minimize taxes and preserve as much of their estates as possible. “Gifting” assets to your beneficiaries during your lifetime is a popular estate planning strategy, designed to remove property from your estate to help reduce potential future estate taxes.

The federal government assesses a transfer tax on estates over a certain threshold. The American Taxpayer Relief Act of 2012 (the “Act”) makes permanent the $5 million estate, gift and generation-skipping transfer (“GST”) tax exemptions, and indexes them for inflation from 2011. Thus, for 2014, the exemption amount will be $5.34 million. The Act sets the rate for all transfers in excess of the exemption amount (for all three taxes) at 40 percent. Gifting assets now not only provides the benefit of removing the assets from your estate where they may be subject to higher estate taxes when you die, but also serves to remove the future growth on the gifted amount from your estate, saving further taxes. Some popular gifting strategies are:

• Annual exclusion gifts. Each year, you can make relatively small gifts (called annual exclusion gifts) that don’t use any of your lifetime gift tax exemption amount. This year, the gift tax annual exclusion amount is $14,000, so you can gift up to $14,000 to as many individuals as you’d like.

• Funding college costs for children and grandchildren. You can make a contribution to a 529 college savings plan, which will be treated as a gift to the beneficiary. You are permitted to accelerate up to five years’ worth of annual exclusion gifts to a 529 plan, putting in as much as $70,000 at once ($140,000 with your spouse). This can remove considerable assets from your estate while preserving your lifetime gift and estate tax exemption.

• Making payments directly to

educational or healthcare institu

tions. You can pay an unlimited amount annually on behalf of another person, as long as you send the money directly to the institutions where the expenses were incurred. Qualifying medical and educational expenses can be made in addition to the annual exclusion amount.

• Donating to charitable organi

zations. By making direct gifts to charities or investing in charitable vehicles, like donor advised funds, private foundations or community foundations, your charitable impact can last beyond your lifetime and provide you with tax benefits. Donor advised funds and private foundations permit you to make a tax-deductible donation, grow your donation, and then recommend and direct a contribution to nonprofits of your choice whenever you like.

Protect assets and preserve wishes with trusts

As part of a comprehensive estate plan, a trust can help you preserve your wealth during your lifetime and facilitate the transfer of assets to your descendants or to a charity that you value and support. There are many different types of trusts and varying goals they seek to accomplish, including: minimizing estate and inheritance taxes; protecting assets from the consequences of disability, family conflict, spendthrift beneficiaries, bad business decisions or other legal issues; providing for special needs children throughout their lifetime, as well as minor children or grandchildren; and enhancing privacy, since trust assets avoid probate’s public proceedings. Briefly, three trusts often included in estate plans are:

• Bypass or credit shelter trust. This type of trust is provided for in a Will or Revocable Trust and is designed to maximize the available tax exemptions of a married couple. When the first spouse dies, his or her remaining estate tax exemption

amount will fund the Bypass trust. The assets in the Bypass trust will not be included in the estate of the surviving spouse and will pass to the heirs free from estate tax.

• Qualified terminable interest

property trust (QTlP): A QTIP Marital Trust is also generally created in a Will or Revocable Trust for the benefit of a surviving spouse. The surviving spouse receives income for life and the balance is typically left to the decedent’s children on the surviving spouse’s death. It takes advantage of the marital deduction, provides an income for the surviving spouse, but controls who the ultimate beneficiaries will be.

• Irrevocable life insurance trust (ILIT) can remove life insurance proceeds from your taxable estate. The proceeds may be used to pay estate costs and provide beneficiaries with tax-free insurance proceeds. Since the trust is the policy owner, you forfeit the right to borrow against it or change beneficiaries. ILIT proceeds can be very useful and, for example, provide financial support to heirs until they can sell an illiquid asset like a business. True wealth management means having a holistic view of all aspects of your financial life. It involves understanding what’s important to you and the causes and goals you find meaningful. These should all form the basis of an estate plan suited to you and your family’s circumstances.

Putting a plan in place, however, can be a complex challenge. Let’s work together— along with your tax advisor and our network of professionals—to identify and implement strategies for your goals, such as managing estate taxes, planning for business succession and maximizing gifts.

True wealth management means having a holistic view of all aspects of your financial life