Wealth Preservation Planning to Leave a Legacy
You’ve worked hard to accumulate assets and build a strong financial base. Have you taken steps to preserve your wealth and pass a legacy to your heirs? Everyone has an estate, though some people have larger estates than others. Regardless of the monetary value of your assets, your loved ones will thank you if you plan ahead. Establishing an appropriate wealthpreservation strategy and legal framework could increase the value of your estate and help avoid potential conflicts, confusion, and delays.
People and Papers To develop a comprehensive plan, you will need certain key documents and the guidance of a professional team. The advisors you choose and the documents you require may vary with your specific situation. These are some of the “people and papers” typically involved in the estate planning process. Naturally, you must give careful thought to your beneficiaries — family, friends, and/or charitable organizations. After all, the estate conservation plan is ultimately for their benefit. Creating an Estate Plan Trustee Estate attorney Tax adviser Beneficiaries Power of attorney Financial professional
A last will and testament is the cornerstone of estate planning. Yet two out of three U.S. adults have not taken this basic step. Source: Caring.com, 2023 A will enables you to specify how your assets should be distributed and to name the executor who will administer your estate. In general, it is better to name a single executor, with a contingent executor if the named executor is unable to carry out his or her duties. Be sure to discuss your wishes with your executor. You can also use your will to designate guardians for minor-age children or adult children with special needs. If you die intestate (without a valid will), the state could decide how your assets will be distributed. Typically, assets would go to the surviving spouse and children, but state laws and distribution formulas vary. When the deceased dies intestate and leaves no spouse or children, the situation becomes more complicated. Where There’s a Will Source: Caring.com, 2023 Excuses, Excuses Primary reasons people give for not having a will or a living trust 42% 35% Haven’t gotten Don’t have enough Don’t know Too expensive around to it assets to leave how to get one to set up 15% 14%
Making Bequests You can use your will to leave assets to beneficiaries in two ways: specific bequests and general bequests. • A specific bequest directs a particular piece of property to a particular person. For example, “I leave Aunt Bea’s silverware to my niece, Jennifer.” • A general bequest is typically a percentage of property or property that is left after all specific bequests have been made. Usually, principal heirs receive general bequests. For example, “I leave all the rest of my property to my wife, Melissa.” Maybe Pablo Should Have Painted a Will Pablo Picasso, who died in 1973 at the age of 91, left an estate that included some of the most valuable art of the 20th century, along with five homes, cash, gold, and bonds. What he didn’t leave was a will. His heirs fought a six-year legal battle for his assets at a cost of $30 million. Other famous people who died without a will include Abraham Lincoln, Howard Hughes, and Sonny Bono. Source: LegalZoom.com TIP: Having a will does not avoid the probate process, but it may help probate be more efficient and less expensive.
Do You Know Your Beneficiaries? In general, the beneficiaries named in your last will and testament will inherit the assets you designate for them. However, with certain types of contracts — including most retirement accounts and insurance policies — the beneficiary designation form typically supercedes any bequest in your will. It’s important to carefully consider the people you name on all beneficiary forms and resolve any conflicts with the beneficiaries named in your will. Here are some key considerations regarding beneficiary designations: • Your current spouse must be the beneficiary of an employer-sponsored retirement plan unless he or she waives that right in writing. If there is no spousal waiver, any children from a previous marriage might not receive the account proceeds you want them to have. • It is wise to designate secondary or contingent beneficiaries in the event that the primary beneficiaries predecease you. Otherwise, proceeds will be distributed according to the default method specified in the account documents and/or state law. • Some insurance policies, pension plans, and retirement accounts may not pay death benefits to minors. If you want to leave money to young children, you should designate a guardian or a trust as beneficiary.
Learning Latin In documents naming beneficiaries, you may see the Latin terms per stirpes and/or per capita. These terms refer to the way assets are distributed if a named beneficiary passes away before you do. Per stirpes (also called “by representation”) literally means by the roots, but it might be clearer to imagine the branches of the family tree. If one of your beneficiaries predeceases you, his or her share would be divided proportionately among his or her heirs upon your death. Per capita literally means by the head, indicating equal shares for each member of a group. If one of your beneficiaries predeceases you, the division of assets would depend on how you defined the group of heirs. For example designating to my children per capita would produce a very different distribution than designating to my heirs (or issue) per capita. Providing for Children and Grandchildren In this example, Edna is a widow who designates her three children (John, Mary, and Bob) as beneficiaries of her estate with equal shares. John has two children (Jill and Jason). If John died before his mother, Edna’s estate would eventually be divided as follows. Bob Bob Bob Jason Jason Jason Mary Mary Mary Jill Jill Jill John John John Edna Edna Edna Per stirpes Per capita to children Per capita to heirs ¼ ½ ¼ ¼ 0 0 ¼ ½ 1 /3 1 /6 1 /6 1 /3 RIP RIP RIP
It’s not pleasant to think about the possibility of having a serious condition that prevents you from making medical and financial decisions for yourself. But it’s better to be prepared and hope it never happens than to put your loved ones in the position of making decisions without knowing your wishes. You might consider using several documents, including an informal letter of instruction that you can write yourself, and legal documents — a living will and durable powers of attorney for health care and finances — that may require consulting with an attorney who is familiar with the laws of your state. When You Can’t Speak for Yourself Letter of Instruction A letter of instruction should include important information your loved ones may need, such as a list of documents and their locations, contacts for legal and financial professionals, a list of bills and creditors, login information for important online sites (but be careful with passwords), and your final wishes for burial or cremation, a funeral or memorial service, organ donation, and charitable contributions in your memory. Be sure to tell the appropriate people where they can find the letter, and keep in mind that the security of the location — for example, a desk drawer vs. a safe-deposit box — might affect what you choose to include. You can update the letter yourself at any time.
Durable Power of Attorney for Finances (DPOA) A DPOA enables you to authorize someone to act on your behalf in financial and legal matters. Your agent could pay everyday expenses, watch over your investments, and file taxes, among other tasks. A DPOA may become effective immediately or when a triggering event occurs, such as a doctor certifying that you are physically or mentally incapacitated. Only around one in three U.S. adults have an advance care directive for end-of-life care. Durable Power of Attorney for Health Care (HPOA) An HPOA, also known as a health-care proxy, enables you to appoint a representative to make medical decisions for you if you become unable to make them yourself. You can appoint anyone to be your agent as long as the individual is of legal age (usually 18 or older), and you can decide how much power your representative will have. An HPOA should be HIPAA compliant so your representative can access your private medical information. Living Will This document can be used to outline which medical procedures you want to be used to prolong your life, typically in the event of a terminal illness. It generally does not become effective until you become incapacitated. Even if your state does not authorize a living will, you may still want one as a way to document your wishes. You also might want a Do Not Resuscitate (DNR) order and/or a Do Not Intubate (DNI) order, which do not require a living will or an HPOA. TIP: You can select the same person to serve as the agent for your HPOA and DPOA, but you aren’t required to do so. Be sure to discuss your wishes with the person you select and let him or her know where you keep the documents; consider giving copies to the agent and key family members. You should review these documents regularly to make sure they continue to express your wishes. Source: Caring.com, 2021
Probate refers to the court proceedings that conclude all the legal and financial matters of the deceased. The probate court acts as a neutral forum in which to settle any disputes that may arise over the estate. This isn’t always as simple as it sounds. The probate process can be expensive and time-consuming, and it is completely public. Many people would prefer to avoid it, if possible. What Is Probate? • Probate can be expensive. Costs vary depending on the state in which probate is carried out, and attorney fees could add to the cost. • Probate often takes a few months to a year or more. And the more complex your estate (will, assets, and debts), the longer it could take. Your beneficiaries may have to wait until probate is concluded to receive the bulk of their inheritance. • In most states, the proceedings of the probate courts are a matter of public record. Unless you take specific steps to safeguard your privacy, almost anyone can go to the county courthouse after your death and find out the value of your estate, as well as how much you owed and to whom. Source: LegalZoom.com
Avoiding Probate Not every estate is subject to probate, and requirements vary from state to state. Some states offer a simplified probate process and/or allow property left by a will to be transferred through a simple affidavit without probate. These provisions are typically allowed only for assets up to a specific dollar limit. An estate planning professional who is familiar with the laws of your state can help you determine whether your estate may be subject to probate. TIP: For large estates, one way to avoid probate is by using a living trust.
Federal Estate and Gift Taxes Federal estate and gift taxes affect only relatively large estates. However, for those estates that are affected, the tax burden could be substantial. Lifetime Exclusion A lifetime exclusion applies to the combined gift total given during your lifetime and the value of the estate you leave after your death. In 2023, the individual exclusion is $12.92 million (the exclusion is indexed annually for inflation). Assets left to your spouse are not subject to the estate tax, and the unused portion of your exclusion can be used by your surviving spouse if certain steps are taken (this provision is called portability). Thus, the total exclusion for a married couple could reach $25.84 million (in 2023). For gifts and/or estates that exceed the exclusion amounts, the top federal estate tax rate is 40%. The estate has to pay any taxes before assets can be distributed to the heirs.
Generation-Skipping Transfer Tax The generation-skipping transfer (GST) tax is a tax on transfers of property you make, during life or at death, to individuals who are more than one generation below you — for example, to grandchildren. The GST tax is imposed in addition to (not instead of) the federal gift and estate tax. However, there is a separate inflation-indexed GST tax exemption at the same level as the federal estate and gift tax exclusion. The maximum tax rate is also at the same level. In practice, this means you could give up to $12.92 million ($25.84 million for a married couple) in 2023 to your grandchildren without paying the GST tax, assuming you had not previously used any portion of your GST tax exemption. However, such a gift would also be subject to the lifetime exclusion levels ($12.92 million individual, $25.84 million married couple in 2023) for federal estate and gift taxes. Annual Gift Tax Exclusion In 2023, you can give up to $17,000 ($34,000 for a married couple) in cash or certain types of property — including income-producing stocks and bonds — to as many people as you wish without any gift tax liability. Some gifts are not subject to the annual limit, including gifts to your spouse (as long as he or she is a U.S. citizen), donations to qualifying charitable organizations, and payments of tuition or medical expenses on behalf of another person that are made directly to the educational or medical institution. NOTE: The GST tax is intended to discourage the practice of leaving assets to grandchildren rather than children in an attempt to avoid paying the estate tax twice (i.e., once when left to children and again when passed from children to grandchildren).
State Estate and Inheritance Taxes In states with low estate tax exemption levels, such as Massachusetts and Oregon ($1 million exemption with 16% top tax rate), even people who might not consider themselves “wealthy” could be subject to state estate taxes. As with federal taxes, state estate taxes do not apply to assets left to a surviving spouse. Only a few states have a portability provision allowing the unused portion of the exemption to be used by a surviving spouse. Source: Tax Foundation, 2022 Many states and the District of Columbia have their own estate tax or an inheritance tax (Maryland has both), and most have exemption amounts well below the federal exclusion level.
State estate tax State inheritance tax State estate tax and inheritance tax
Even if the estate tax does not affect you, the step-up in basis on inherited assets, which was made permanent by the 2012 tax law, could be important to you and your heirs. Consider this example. Thank You, Uncle Pete Your Uncle Pete bought stock for $2,000 and left you the shares when he passed away, at which time they had appreciated in value to $10,000. At this point, your basis in the shares is stepped up to $10,000. If you later sell the stock for $12,000, you would owe capital gains tax only on the $2,000 of appreciation since you inherited them, rather than on the $10,000 of appreciation since Uncle Pete bought them. This same approach applies to many other types of assets, including real estate. If you inherit a house, the basis would typically be the fair market value of the property at the time of the owner’s death. Adjustments may be required for any depreciation taken for tax purposes. Stepping Up Your Assets NOTE: The step-up in basis does not apply to certain inherited assets such as cash, variable annuities, and retirement accounts.
Rules for Couples In the nine states with community property laws, the surviving spouse typically receives a full step-up in basis on joint assets after the first spouse dies. In most other states, the step-up is on one-half of the asset’s value. Consider this example: A couple purchased a house together for $40,000. When the husband dies, the house is worth $200,000. In a community property state, the wife’s basis in the house typically would rise to $200,000, the value at the time of her husband’s death. If she sold the house for $200,000, she would not owe capital gains tax on the sale. In most other states, the wife’s basis would typically rise to $120,000 — $20,000 for the husband’s original portion and $100,000 for the current value of the wife’s share. If the wife sold the house for $200,000, she might be liable for capital gains tax on $80,000 ($200,000 less $120,000 basis). However, she may be eligible for a one-time exemption on selling a principal residence. If she owns the house until her death, the basis would step up again for her heirs. Note: Alaska adopted a community property system in 1998, but it is optional. A Change in Gifting Strategy In the past, some people with large estates would gift highly appreciated assets in order to keep the assets out of their estates. The step-up in basis does not apply to gifts, so it generally would be more tax-efficient to hold on to the asset until the original owner passes away. In the example above, if the couple gave the house to their children during their lifetimes when it was valued at $200,000, the $160,000 increase in value since the time of purchase might be subject to the capital gains tax.
Trust Strategies A trust can accomplish a wide variety of estate planning goals, depending on your needs and the type of trust you choose. Here are some basic trust terms and concepts. A trust is a legal arrangement under which one person or institution controls property given by another person for the benefit of a third party. The person giving the property is referred to as the grantor (or trustor), the person controlling the property is the trustee, and the person for whom the trust operates is the beneficiary. With some trusts, you can name yourself as the trustor, the trustee, and the beneficiary.
The use of trusts involves a complex web of tax rules and regulations. Trusts involve up-front costs and ongoing administrative fees. You should consider the counsel of an experienced estate planning professional and your legal and tax advisers before implementing a trust strategy. Parties Involved in a Trust Grantor Trustee Assets Beneficiaries Assets Trust
Testamentary vs. Living Trusts A testamentary trust becomes effective upon your death and is usually established by your last will and testament. It enables you to control the distribution of your estate, including the opportunity to name a guardian for minor children’s assets, but does not avoid probate. A living trust takes effect during your lifetime. When you set up a living trust, you transfer the title of all the assets you wish to place in the trust from you as an individual to the trust. Technically, you no longer own the transferred assets. If you name yourself as trustee, you maintain full control of the assets and can buy, sell, or give them away as you see fit. However, this option may negate any estate tax benefits. Revocable vs. Irrevocable Trusts Living trusts can be revocable or irrevocable. A revocable trust can be dissolved or amended at any time while the grantor is still alive. An irrevocable trust, on the other hand, is extremely difficult to modify or revoke, subject to state law. By definition, testamentary trusts are always irrevocable.
Comparison of Trust Benefits Features* Will Testamentary trust Living trust Revocable Irrevocable Control distribution of assets Yes Yes Yes Yes Appoint guardian for minor-age children Yes Yes No No Avoid probate No No Yes Yes Avoid estate taxes No No No Yes** Defer/reduce capital gains tax and/or income taxes No Yes** No Yes** Protect assets from lawsuits and creditors No Yes** No Yes** *Applies only to assets included in a will or a trust. **Depends on structure and situation.
Although you may want a general trust to help preserve your assets, there are various types of trusts designed for special purposes. Here are two of the most common. Either of these could be set up as a standalone trust or incorporated into a living trust. Specialized Trusts About 13.5% of the U.S. population have some type of disability. Source: disabilitycompendium.org, 2023 (2021 data, most recent available) Special-Needs Trust A special-needs trust can help provide for an individual’s lifetime care and other financial needs while maintaining eligibility for government programs such as Medicaid, Medicare, and Social Security Disability Insurance. When someone with special needs receives a life insurance payout or inheritance directly, he or she could be disqualified from government assistance programs. A special-needs trust avoids such an outcome. Distributions from the trust can be made at the discretion of a trustee to pay for a beneficiary’s special needs.
College Beneficiaries Trust Business Assets Harmful behavior Incentive Trust An incentive trust includes requirements or milestones that must be met before a portion of the trust money is awarded. Provisions may be drafted to promote education, entrepreneurship, public service, or philanthropy; to supplement earned income; and even to discourage certain harmful behaviors. ?
Flow of a Charitable Lead Trust Beneficiaries Assets Charitable organization Donor Annual income Remaining assets Death of donor Trust Charitable Trusts trust is not subject to capital gains taxes. The CLT pays an income to the designated charity until the trust ends, which could be a set number of years or upon the death of the donor. The remaining assets are then returned to the donor or the donor’s heirs. A CLT could provide an income stream to your favorite charity and help reduce, or in some cases eliminate, estate and gift taxes on appreciated assets that eventually go to your heirs. Do you have a favorite charity that you would like to endow with a generous gift? If so, you may want to consider two types of charitable trusts that offer benefits to the donor as well as to the charity. Charitable Lead Trust A charitable lead trust (CLT) may be appropriate if you want to gift appreciated assets. When you transfer assets to the trust, the fully appreciated value of the assets is preserved, because the
Flow of a Charitable Remainder Trust Charitable organization Donor Assets Remaining assets Annual income Death of donor or beneficiary Trust Charitable Remainder Trust A charitable remainder trust (CRT) may enable you to structure a charitable gift so that you receive not only a tax deduction but also a financial benefit during your lifetime. You would transfer money, securities, property, or other assets to the trust; name the charitable organization as the first beneficiary; and designate an income beneficiary — yourself or anyone else you choose — to receive income from the trust. The income payments must be made at least once a year and could last for a fixed term (not exceeding 20 years), for your lifetime, or for the lifetime of your surviving spouse or other designated beneficiary. Income payments might be fixed or variable, depending on the trust; the trust income is generally taxable. In the year that your gift is put in a CRT, you may qualify for an income tax deduction based on the estimated present value of the remainder interest that will eventually go to the charity. Upon your death (or the death of your spouse or designated beneficiary), the remaining trust assets go to the charity.
Life insurance could play an important role in your wealth-preservation strategy. Although many people allow their life insurance policies to lapse as they get older, there are good reasons to maintain coverage. Life Insurance Strategies The most obvious reason, of course, is to provide for your spouse and others who depend on you. If the day-to-day needs of your loved ones are taken care of, you may want coverage to provide liquidity and potentially increase the value of your estate. Covering Costs A life insurance policy could help pay any taxes or other liabilities due on your estate. But even if your estate is not subject to taxes, end-of-life costs — medical expenses, legal costs associated with tying up financial affairs, and other final expenses — could be a burden for your heirs. Unlike some assets, life insurance death benefits are typically paid relatively quickly, and an insurance death benefit is usually not subject to federal income tax. A relatively modest life insurance policy could be a big help during a difficult time. Life Insurance Trust Day-to-day needs Beneficiaries The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have contract limitations, fees, and charges, which can include mortality and expense charges.
Last-Survivor Policy Unlike traditional policies, a last-survivor life insurance policy insures two or more individuals (often a married couple), with the beneficiaries often being children or other heirs. Because the policy pays the benefit only after the death of the last-surviving insured party, the premiums are often lower for a last-survivor policy than they would be for the cost of two individual policies. Life Insurance Trust If you anticipate that your assets may be subject to federal and/or state estate or inheritance taxes, you might consider an irrevocable life insurance trust (ILIT). An ILIT could keep insurance policy proceeds out of the taxable estate and provide ready cash to help pay taxes on any estate assets that exceed the exemption amount. You would fund the ILIT, and the trustee would use the money to purchase a life insurance policy that is owned and controlled by the trust. Typically, you would gift additional money to the trust each year, and the trustee would use the money to pay premiums on the policy. When you (the insured) die, the life insurance proceeds are paid to the trust, and the trustee distributes the proceeds according to the terms of the trust. Keep in mind that once the ILIT is created, you cannot change the terms or beneficiaries of the trust, and you must give up control of the life insurance policy. People insured under policies owned by the trust cannot serve as a trustee. All life insurance premiums must be paid by the trust. Life insurance policy Irrevocable trust Proceeds free of estate taxes
An Expensive Possibility Long-term care costs vary among different facilities and from state to state. Wherever you live, you may want to address the potential for long-term care costs in your estate plan. Source: Genworth Financial, Inc., 2022 (data based on median annual cost of a private room in a nursing home; 2021 data) $98,550 Ohio $85,107 Texas $115,523 Florida Long-Term Care Long-term care may be needed when a chronic condition or illness limits a person’s ability to carry out basic activities of daily living (ADLs) such as bathing, dressing, and eating. You may not think of long-term care as an estate planning concern, but the cost of care could quickly erode the value of your estate. Consider these statistics. • 56% of people turning 65 will need some form of long-term care in their lifetimes. • The national median annual cost for a home health aide (44 hours per week) is $61,776. • The national median annual cost of a private room in a nursing home facility is $108,405. Sources: U.S. Department of Health and Human Services, 2022; Genworth Financial, Inc., 2022 (2021 data) (most current data available)
$146,000 California $158,797 New York
Updating Your Estate Plan Creating a comprehensive estate plan is a substantial undertaking, and you may feel more secure when you have the appropriate documents and strategies in place. But the process doesn’t stop there. It’s important to review your estate plan regularly and update documents as necessary. Passing It On Warren Buffett’s “Giving Pledge” encourages wealthy people to leave a majority of their fortunes to nonprofits rather than to family. You may want to leave a financial inheritance to help your children, but may also want to pass along shared values and life lessons. Financial & real estate assets Values & life lessons
Staying Current Here is a checklist to consider in reviewing your estate plan. • Have there been changes in your family, such as the birth of a child or grandchild, a death, a divorce, or a remarriage? • If so, do your beneficiary designations reflect these changes? Even if your family has remained the same, do your designations still reflect your current wishes? • Have there been financial changes that could affect your choices? Have you bought or sold assets? Have you received an inheritance or a financial windfall? • Have there been changes in your health or the health of your spouse or other family members? Keep in mind that if you make changes to your estate plan, you may need to modify multiple documents.
Conserving your estate requires careful planning and professional guidance. Taking action now may help you leave a greater legacy — and help the estate you leave behind avoid conflicts, delays, and expenses. Prepared by Broadridge Advisor Solutions © 2023 Broadridge Financial Solutions, Inc.
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