Source: RSM US LLP. PBMares is a member of RSM US Alliance.
You have worked hard to grow your wealth to create security for you and your family. Now, implementing processes for your assets and estate will provide future generations with the resources to continue managing the assets and security you established.
Numerous factors, however, may hinder the ability to successfully transition assets. Here are some of the most common issues in wealth preservation, along with ideas to prevent potential negative impacts on your estate:
1. Income Taxes
Unnecessary taxes may result from estate planning that fails to consider other tax implications to you and your spouse, your businesses, family trusts and beneficiaries. Income tax for high net worth families in some cases may be over 50% with state and federal income tax and net investment income tax.
Solution: Have your advisors work together to evaluate all estate, income and other tax considerations, and incorporate the analysis into your estate plan. Understanding these key income tax considerations and planning points can help minimize your tax obligations.
Not communicating your intentions for your estate could, at a minimum, create hurt feelings if a beneficiary receives less than anticipated. On the other end of the spectrum, lack of communication could create ambiguity about your intent and considerable legal fees for estate or trust defense, which are charged against estate or trust assets.
Solution: Communicating your intent during your lifetime and making your intentions clear in your estate documents can significantly reduce any potential surprises to beneficiaries and possible legal fees. Some lawyers use a grantor letter of intent that, while not legally binding, may show more emotionally tied reasons for your decisions to help beneficiaries process your reasoning for their bequest.
3. Asset Transition
Holding onto all of your assets in your personal name could subject your estate to taxes unnecessarily.
Solution: It may be best to start gifting assets now to remove asset value growth or life insurance proceeds from your taxable estate. There are numerous methods to gift based on your family structure and dynamics, asset types, and cash flow needs.
As of 2022, you are allowed to transfer $12.06 million, either during your life or upon your passing; this amount is exempt from estate and gift tax. This amount is adjusted for inflation but is set to be cut in half in 2026. If you use the current exemption amount now, the full exemption amount should be excluded from your estate, even after 2026.
In addition, you may give as many individuals as you like up to $16,000 a year without using any of your exemption amount (adjusted for inflation). Qualifying tuition and medical expenses paid directly to institutions are also excluded from using your exemption amount.
The added benefit of starting to transition assets is to educate your children about managing assets and finances. Leading by example and demonstrating preservation strategies will help maintain multigenerational success of assets you worked hard to create for your family. The earlier you start your estate and gift planning, the more financially informed your family will be and tax efficient the plan will be to maximize assets passing to your family.
4. Asset Beneficiaries
Not considering which beneficiaries will get which assets may create undue tax consequences for beneficiaries.
Solution: It is more tax effective to give certain assets to certain beneficiaries, and some assets may be better managed by particular beneficiaries. For example, distributions from traditional retirement accounts do not receive a step-up basis and are subject to ordinary income tax rates. This makes retirement accounts a great option for fulfilling charitable intent; or if you have children or grandchildren in lower tax brackets, it may be beneficial to have them receive distributions from these accounts while preserving tax-favored assets for other beneficiaries.
You could also allow the trustee to adjust distributions based on anticipated income tax on the assets a beneficiary receives. Another example is when there are business interests involved; it may be wise to have participating family members whom you trust to carry on the business operations and ensure that they have future control of the business.
5. Charitable Legacy
If you have charitable intent, charitable gifting can be a win for the charity and your family.
Solution: Review your assets and charitable intent with your tax advisor to structure an overall plan that optimizes charitable gifts along with potential tax savings for your family. Business or other substantial assets provide various charitable planning opportunities that take time to develop, so let your tax professional know as soon as you begin to think about a business or asset sale that may incorporate a charitable component.
6. Tax Changes
Tax policy—through legislation, regulations and court cases—is affecting estate planning on an ongoing basis.
Solution: It is prudent to review your plan with a tax professional periodically or when any major tax changes are enacted. Reviewing your plan helps ensure that it remains as tax efficient as possible and has incorporated any tax policy changes since the last plan update. This also presents an opportunity to review plan provisions and consider other changes in circumstances that may affect the plan’s ability to carry out your wishes, including fiduciary designations.
7. Family Changes
Your plan could become outdated when there is a change in your family.
Solution: Review and update your estate plan when your family structure changes to ensure that your goals are still being achieved. A change in family could include marriage, death, divorce, the arrival of grandchildren or a change in active members in a family business.
8. Risk Management
Incorporate risk management strategies into your overall wealth plan.
Solution: Determine the level of risk tolerance you have and reevaluate and rebalance your asset holdings on a regular basis. Establish entities, such as trusts and LLCs, to protect assets from creditors. Trusts may also offer asset protection from beneficiary divorces.
In the event that you require liquidity, ensure that you have enough personal cash and liquid assets to avoid having to pull significant amounts out of investments that may have suppressed in value during a recessionary period. Consider the implications of changing interest rates and inflation on your cash needs and asset values.
9. Administrative Costs
Avoid unnecessary administrative costs through proper estate planning.
Solution: Use a revocable trust to avoid probate. Ensure any trusts created are properly funded and any asset transfers are correctly documented. This should help avoid the costs of having to go to court for the probate administration process.
10. Business Mindset
It may be easy to think that there aren’t as many issues surrounding your individual assets in contrast to the complexities of a business. However, multigenerational wealth transition planning is complex and requires as much attention and oversight as any business to ensure it is done properly and with best practices.
Solution: Have periodic advisory meetings to reassess your goals and update your plan accordingly. Periodically interview other advisors to confirm that your current advisory committee is being proactive and meeting all of your family goals and needs. Your advisors should be responsive, communicative and proactive in assessing your needs and providing relevant planning opportunities.
PBMares professionals are here to help advise you and your family on how to reduce the potential negative implications of factors that may affect your wealth. PBMares collaborates with your other advisors, and offers estate plan reviews along with strategies that incorporate numerous techniques that may help maximize tax savings while prioritizing your family goals and wishes.
This article was written by Abbie Everist, Andy Swanson and originally appeared on 2022-09-22.
2022 RSM US LLP. All rights reserved.
The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.
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