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 firstname.lastname@example.org.