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Wealth Transfer

Estate Planners | Tuesday, September 21st, 2010

The Right Way to Transfer Wealth

Tax savings and family harmony are two important byproducts of effective estate planning. Smart planning can maximize both.

As political change sweeps through Washington, D.C., the future of the Estate Tax is far from settled. Under the current law, the tax on the value of your estate declines to zero in 2010, but is scheduled to reappear with a vengeance in 2011 with rates as high as 55% and hitting estates as small as $1 million. Subsequent modifications between now and January 1, 2011, by Congress and the President Obama are likely to modify the tax but are highly unlikely to make it go away completely.

Tax savings, however, are only one goal of estate planning, and in many ways secondary to ensuring that your wealth continues to do what you want it to do long after you’re gone. You could set up trusts to provide a financial cushion for multiple generations of your family, perhaps to pay educational costs or provide start-up capital for a new business, or if you’re especially ardent about your alma mater, you may want to fund scholarships and put your name on a library, lecture hall or even a football stadium. You may also care deeply about a cause or philanthropic organization that you want to continue supporting.

Regardless of what you want your wealth to do for you, the time to plot the course and put your affairs in order is now, before you need it to spring into action.

Achieve Goals Through Planning

An estate plan that protects assets and shields heirs from taxes is going to be an important element of financial planning for families who are expected to transfer $41 trillion of assets to heirs and charity through 2052.

At the core of the planning process is deciding on working with your financial advisor and estate planning team, including attorneys and accountants, to establish specific objectives and intentions and to execute the plan.

In this process, you should address how much, when, and in what form you should transfer an inheritance or gift.

Your Starting Lineup

Much like a coach putting together a talented team that can work together to produce results, you should make sure that you have fielded the right group of players for your planning needs. On the team you’ll need good position players: your financial advisor, your attorney, and your CPA or tax professional. These professionals should be able to address all aspects of your estate planning wishes. The attorney executes documents to establish trusts or foundations; the CPA keeps a close eye on tax outcomes; and your financial advisor works to coordinate these activities with your existing and future investments.

The cost these services generally is quite small in relation to the cost of not putting together a team to keep your heirs from paying a large sum to Uncle Sam.

Timing Your Taxes

Because of the changing nature of the Estate Tax, it’s important for you and your advisors to include needed flexibility should the laws change significantly. The exemption from the tax is $3.5 million in 2009 and the tax is scheduled for a one-year repeal in 2010.

If you have a plan in place, you need to review documents to make sure they are still in line with the new tax environment. In addition, you should make sure your plan still reflects your intentions.

Family Matters

The specific manner in which you transfer your estate can have a lasting impact on family dynamics. Done improperly, there can be family members who will feel slighted that they did not get an amount equal to a brother, sister, or stepmother. The best way to address these problems is by communicating your intentions to family members ahead of time and to achieve some kind of consensus. Family meetings in which you discuss roles and responsibilities as stewards of wealth can be a great medium.

There are steps that you can begin to take today to reduce your estate tax burden and they all revolve around giving away assets to minimize the size of your estate, even though it may be difficult to start giving away what you have. The sooner you get started making gifts and funding trusts, the greater is the likelihood that you will be able to lessen the impact of taxes down the road.

Get started now by setting up some time to meet with your planner to discuss your own legacy goals.

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