Recently, there has been a major shift in the way clients feel about legacy planning. Keith Dykes, a vice president and senior partner at Peachtree Planning Corporation, says many of his clients are coming into wealth management planning with a different thought process.
“In the past, they may have said ‘I’m fine with my kids working for everything the same way I did,’” he says. “But many of our clients are not sure the opportunities they had are going to be there in tomorrow’s world. Leaving some money for future generations has become a bigger focus for our affluent clients.”
Smart Business spoke with Dykes about the different ways you can leave a legacy.
How have changes to estate tax laws affected your planning strategies?
The most obvious has been the increase in the unified tax credit, which has increased from $600,000 10 years ago to over $3 million today. This has made it much simpler to move smaller estates down to the next generation with a minimal amount of taxation.
There have also been a number of states that have relaxed their rules against perpetuities. This rule basically said you could not tie money up forever in a trust. It ultimately had to be distributed and taxed. Many states have repealed those rules and you can now set up a dynasty trust that can last much longer and benefit multiple generations. Many clients are attracted to this type of trust because it can be set up where one single generation cannot deplete the trust.
How much control can people have over assets left in a trust?
Trusts can be written to allow or reduce control of the beneficiaries of the trust based on what the donor prefers. One area we have seen a growing interest is in the incentive trust area. Incentive trusts have been around for a while. Effectively, they allow you to provide incentives for certain behavior from your kids and grandkids, or whoever benefits from the trust. The idea of not wanting to spoil or overindulge your children by providing money is almost always an issue when leaving money to other generations. You can create the trust, leave the money in the trust, and then the trustee distributes the amount specified in the trust for that particular activity. So you are providing incentive for the behavior.
Literally, there’s nothing you can’t put into an incentive trust. For example, if you wanted your daughter to have the option to be a stay-at-home mom, you could pay her a certain amount per year to be a stay-at-home mom versus being the second income in a family.
Another example we’ve seen is setting up the trust to give children a distribution from the trust equal to what they are able to produce on their own tax return. By creating a matching scenario, it provides incentive for the behavior of going out and being successful in their own right.
Is there a strategy for people who may not have the funds but still want to leave a legacy?
One of the most cost-effective methods is to purchase life insurance. Most life insurance policies are purchased because someone wants to leave a legacy. It may be to educate a child, to take care of a family, or sometimes people will make a church or charity a beneficiary of their life insurance. Life insurance proceeds can be used to fund that dynasty or incentive trust. Its proceeds can allow you to leave cash tax free to the next generation and use other assets to fund the trust more tax efficiently.
One of the primary benefits of including life insurance in your legacy planning is it allows you to use and enjoy your savings and investment assets now with the comfort of knowing you will still leave a sufficient estate to take care of your family.
This is especially helpful today when many clients are struggling with having not only to fund their own retirements but also having to continue to provide support to children and grandchildren who are having a tough time in this economy. With a properly structured plan you can spend more of your current assets when they are needed most and still pass on a meaningful legacy.
Where can business owners begin when evaluating legacy planning strategies?
Passing an operating business down to the next generation can be much more complicated than any other type of asset. Usually the owner must consider who will continue to operate the business. Does he or she have an heir in the business? Will the business be sold? Will keeping the business create possible liquidity problems, especially if the plan utilizes trusts or more complicated gifting strategies? Each situation is different, and the most important thing for business owners is to meet with a competent adviser and communicate exactly what they would like to see happen to their wealth.
Keith Dykes is a vice president and senior partner of Peachtree Planning Corp. Reach him at email@example.com or (404) 260-1621.