When you no longer have control
over your financial affairs, do you
want the courts, legislators and taxing authorities to decide how much of
your wealth you, your family and your
favorite charities get to enjoy?
“It’s important for those who want to
leave as much of their hard-earned wealth
as possible to family to plan ahead,” says
Carlos A. Rodriguez, senior vice president
and senior trust adviser, with the Private
Wealth Management division of SunTrust
Bank in Tampa. “You take control while
you can, or you’ll have none.”
Smart Business asked Rodriguez for
insight on how best to preserve and transfer your wealth during life and at death.
What should be handled first?
Your first priority should be to preserve
the wealth that you’ll need to access while
you’re alive through financial, retirement
and asset protection planning. Before you
start making substantial gifts, you’ll want to
make sure you have what you need for
retirement and extended medical care. Also,
plan to minimize incapacity costs associated with an extended illness or guardianship
proceeding by having a durable power of
attorney, advance health directives and a
revocable living trust. In addition, consider
maximizing investments in tax-advantaged
and/or creditor-exempt assets.
What about the death tax?
Under the current federal estate tax laws
for 2007 and 2008, a single person dying
with more than a $2 million estate is actually leaving the IRS 45 percent of everything
over $2 million, unless he or she leaves the
‘excess wealth’ to charity. A married couple
with children, if they plan it right, can leave
the kids and/or grandkids a combined $4
million free of estate tax. If Congress does
nothing, these ‘exemption amounts’ will
automatically rise to $3.5 million and $7 million, respectively, in the year 2009.
The experts speculate almost unanimously that the estate tax will be made permanent in 2009 and beyond with a per-estate exemption amount set at $3 million to $3.5 million and an estate tax rate of
about 45 percent.
How do second or third marriages affect the
situation?
There are planning issues unique to second or multiple marriage situations. These
pose the biggest problems if you don’t have
a well-developed and spelled out plan.
Either a prenuptial — before marriage —
agreement or a postnuptial — after marriage — agreement is imperative if your
desire is to provide anything to children
from a previous marriage. Surviving spouses have certain default inheritance rights in
most states that can take priority over a
conflicting bequest [e.g., to a child from a
previous marriage]. Without a prenuptial
agreement, it is not only possible but probable that a deceased spouse’s children
from a previous marriage could receive
less than anticipated or worse, be cut out
entirely because of the surviving stepparent’s inheritance rights.
What is intergenerational wealth planning?
In addition to, or oftentimes in lieu of, a
prenuptial agreement, a certain type of
trust, commonly referred to as a ‘dynasty trust,’ can serve as a tool to keep the family wealth in the family across several generations. For example, if parents leave
assets to their children in a way that the
children have unlimited control and ownership, those assets can be depleted during
the kids’ lives by their own creditors [i.e.,
tort, divorce] and at their deaths by estate
taxes. In other words, ‘inherited wealth’ —
if it comes with no strings attached — is
usually fair game for the heir’s creditors,
financial predators, ex-spouses, guardianship costs and the IRS. The dynasty trust
allows ‘inherited wealth’ to pass down the
generations in a way that will limit this
‘financial drain’ while at the same time
allowing the members of each generation
to benefit from the wealth.
Is the death benefit on life insurance taxable?
Because of the tax and creditor protection advantages the state and federal laws
have given life insurance, it can be an
incredibly powerful tool. It comes as a surprise to most that the death benefit on
insurance covering their lives will be
‘counted’ as part of their taxable estate at
death. However, if the life insurance is
owned inside a properly structured
Irrevocable Life Insurance Trust, or ILIT,
then the death benefit will be outside of
their taxable estate. The use of an ILIT is
especially important for real-estate rich,
cash-poor individuals. The heirs can access
the cash inside the ILIT via a loan or asset
sale to cover the tax bill and, thereby, don’t
have to sell the real estate at unfavorable,
‘fire sale’ terms.
Neither SunTrust Bank nor its employees are authorized to give legal or tax
advice. The views expressed in this article are not intended to be relied on as such.
You should retain your own legal counsel
or tax advisor before entering into any
transaction described in this article.
CARLOS A. RODRIGUEZ, J.D., LL.M. is senior vice president
and senior trust adviser in the Private Wealth Management division of SunTrust Bank in Tampa. Reach him at (813) 224-2477 or
[email protected].
