By FPA Members Elaine King, CFP®, CDFA™ and Philip Herzberg, CFP®, MSF
Last Updated: February 6, 2012
How can you optimally handle the responsibility of planning and protecting wealth for your intended heirs and causes? Devise trusts that hold assets outside your estate. The goal is to maintain the value as much as possible from tax erosion and protect how you pass on your financial assets and other property to future generations.
With the collective guidance of a CERTIFIED FINANCIAL PLANNER™ and qualified estate attorney, you can clarify your goals and strategize how to minimize estate-relevant transfer taxes, while possibly supporting a preferred charity and providing an income stream to the benefactor. In addition, utilize the advice of legal and financial specialists to capably make adjustments as family circumstances change and keep informed on evolving tax laws.
Recognizing that these strategies may be most suitable for estates larger than $5 million, you can refer to and apply the following insights to further navigate your wealth planning and asset protection.
Assess the purpose of your trust and considerations of your family to formulate planning.
- Choose responsible family member(s) or professional trustee(s) to carry out the provisions of your trust and manage the investment, tax, legal, and interpersonal issues that can arise. Make sure you select an objective trustee, who is flexible and sensitive to both your family’s aspirations and changing needs of your trust. Communicate your decision-making process to assure yourself peace of mind and prevent placing family members in an uncomfortable position.
- Keeping in mind that you create a plan to answer specific needs, you can establish different kinds of trusts for your children, including educational trusts to support their college, graduate school, or private school education. Note that trusts can also be established with a diverse array of provisions to reward your heirs with distributions for achievement or to limit them by withholding disbursements for poor behavior. Think about designating a spendthrift trust, an instrument where a trustee has clear directions on how and when to distribute money, to protect your child from spending money too quickly or rashly.
- In conjunction with the counsel of a seasoned estate lawyer and financial planner, you should determine whether to set up and structure a credit shelter trust to take advantage of both you and your surviving spouse’s maximum estate-tax exemptions. Be cognizant that your surviving spouse can receive lifetime distributions, with the remainder of this bypass trust’s funds going to your children or other intended heirs. Given recent tax law changes, you should frequently review your estate plan with expert legal and financial professionals, and if necessary, adjust the amount of funding allocated for the credit shelter trust. Should you leave your assets in a credit shelter trust given the new estate tax portability features? Consider the viability of planning your trusts to take advantage of the federal exemption portability, with your unused portion of your estate tax exemption carrying over to your surviving spouse’s future estate.
- How can you prevent assets from transferring to your surviving spouse’s new husband and possibly their children after your death? Use a Qualified Terminable Interest Property (QTIP) trust to enable your surviving spouse to have an annual lifetime stream of income, as well as to ascertain that the principal QTIP assets pass as you indicate after your surviving spouse’s death.
With proper legal and tax professional oversight, you can consider establishing a Grantor-Retained Annuity Trust (GRAT) to remove assets that are expected to increase in value, possibly permitting the transfer of appreciated property to your subsequent generations tax-free when the trust ends. Alternatively, you may set up a Qualified Personal Residence Trust (QPRT) for your family to remove the future appreciation of a home’s value from your estate. Be aware that the personal residence goes back into your estate if you die before the QPRT term ends.
Seek flexibility, diversification, and business risk mitigation in protecting your trust’s assets.
- Safeguard your family-owned business or professional association by selecting an independent trustee or professional trustee(s) to have discretion over the trust’s money, providing you with distributions when needed. In essence, your trustee has a fiduciary duty to regularly review your closely-held business or family-run assets in the trust, and to evaluate whether they are most appropriate to serve the best interests of its beneficiaries and remaindermen. For instance, your trustee can exercise due diligence and decide on an investment policy that will adequately diversify assets in accordance with your trust goals and objectives.
- Remember to review your asset protection strategies, particularly those supposed to be shielded from potential creditors in legal judgments, with an estate planning attorney who is well-versed with the laws in the state where you live and where your trust is located. Weigh the merits of placing your family business, real estate investments, or other personal property (i.e. boat) into a limited liability company or family limited partnership to mitigate the risk of creditors taking any personal assets due to business financial difficulties. Another suggestion is to shift your personal risks to an insurance company to protect assets from personal injury claims above the standard liability limits established by standard-issue policies.
- Update your estate plan to reflect changing life circumstances (i.e. marriage, divorce, birth of grandchildren, etc.), and remember to articulate any significant revisions affecting finances to your family members and other loved ones. Carefully review the titling of each asset to ensure protection and smooth transition after the death of a family member.
- To keep information accessible for your heirs and power of attorney, you can store digital copies of your important documents and financial data in password-protected online sites (i.e. www.legacylocker.com, www.keepass.info).
Ultimately, by understanding and following through on these pivotal wealth planning and protection pointers, you can fulfill your desires and sensibly prepare for your family’s financial future and well-being.
FPA member Elaine King, CFP®, CDFA™, is Chairman of FPA of Miami-Dade and Author of Family & Money Matters, La Familia y El Dinero Hecho Facil. FPA member Philip Herzberg, CFP®, MSF, is President-Elect of FPA of Miami-Dade and Director of Media Relations & Public Awareness for FPA of Florida/Miami-Dade.