Preserving Your Wealth

By Nancy Zambell, Contributing Editor, Financially Fit

I always joke that, in my family, when someone passes away, it costs me money! And while my brother and sisters and I laugh about it, sadly, it's true. Our parents were hard-working folks who always struggled to make ends meet. And they just never had the opportunity to accumulate much to pass on to their five children.

My guess is that many of you came from the same types of families. And probably, like me, you decided that your generation was going to be different - get a good education, work hard, invest your extra money and make solid plans for the future, which most likely includes passing on at least part of your assets to your heirs.

And while I have no children, I do have nieces and nephews who have enriched my life beyond imagination, and I want very much to leave something behind for them. Consequently, I have always been interested in learning about estate planning and have now reached a point in my life when it's time to take action. And when, exactly, should this become a priority? The sooner, the better—but late 40s or early 50s would be sufficient for most people.

In my research, I have come across volumes of estate planning advice - from the very simple to the outrageously complicated. But I've learned through a couple of decades in the financial industry that the complex doesn't always mean the best way, so I tend to favor the simple devices that any investor can incorporate into his or her lifetime plan.

My intent here is to give you an overview of some of the tools that are available to help you in your quest for estate planning knowledge. But since I am not an attorney, please don't take this as legal advice for your particular situation. I strongly recommend that you seek assistance from your attorney, as well as your accountant, to help guide you in setting up the best plan for you and your family.

So, let's get started. The first item on the list: Hire a good advisor (please see the Sept 26 column for some pointers). I have looked at many portfolios for friends and family members and have found one very common mistake: Their assets are often scattered among numerous brokerage firms and mutual fund companies. If this rings true with you, I would recommend that you consolidate all of your investment accounts under the umbrella of one firm. Believe me, it will save you a lot of time in the end- and probably money, too. But the best payoff will be in your estate planning. It will be much easier for your advisor to help you plan your and your heirs' futures if he knows exactly where and what your assets are.

Next, take stock of exactly where you are, financially, where you want to be when you retire, and how much of an estate you intend to leave for your heirs, as well as to charity.

Now comes the hard part. Take a look at your family. Who do you want to inherit your hard-earned wealth, how much, and when do you want them to inherit? Do you want to place any restrictions on the distribution of your estate? This task can open a huge can of worms. So, spend a lot of time thinking this over, discussing it with your spouse, as well as with your financial advisor.

Your number one priority should be to minimize your inheritance taxes. That is where a good financial advisor will be worth his weight in gold. You will need to consider how to structure your current, as well as future, assets. The three taxes that will most concern you are:

• Gift Tax: Currently, you may gift up to $12,000 per year to each heir, up to $1 million in your lifetime. If you go over the limit, you will pay dearly via this gift tax.

• Estate Tax: Through 2008, the IRS will tax estates valued at more than $2 million. This tax is due to be repealed in 2010, for one year, but may also vanish prior to that time. However, keep in mind that most states also tax your estate.

• Generation-skipping transfer tax (GST): Also through 2008, the IRS will levy a large tax on estates more than $2 million so that you don't try to directly pass your wealth to heirs two generations removed.

There are many vehicles to maximize your gifting, including paying the tuition for your children or grandchildren without bringing the gift tax or GST gods down on your head. These include creating a minor's trust to distribute assets at designated times, setting up a qualified personal residence trust to give your residence to your heirs at a discount, or creating a family limited partnership for your real estate or business assets.

If you wish your heirs - and not Uncle Sam - to inherit the bulk of your estate, tax planning should be your #1 priority.

Other considerations:

Do you want to begin withdrawing cash from your retirement assets to fund gifts to heirs and charities, in order to reduce the size of your eventual estate? In many cases, tax-wise, it is best to fund over time, instead of in lump-sum distributions.

Many people have found that setting up a trust works best for them. A bypass trust is often used for large estates, and is established through the will of the first spouse to pass away. Then the surviving spouse controls the asset distributions, and when that person dies, the assets are passed on to the trust's heirs, estate tax-free.

Alternatively, a QTIP (qualified terminable interest property) trust is often used when your current spouse is not the parent of your child or children. Also set up by your will, the QTIP is designed to ensure that your spouse can receive income and assets upon your death. Then after he or she passes away, the assets will go to your designated heirs - most likely, your children.

You may also want to consider creating separate IRAs for each of your heirs.

Next, as much as we don't want to face it, there may come a time in each of our lives when we are unable to make the important decisions that are needed. Therefore, it is of utmost importance that you think about whom in your life could be trusted to make those decisions for you. Then, you will need to set up a durable power of attorney (DPA). This will appoint your designated person to handle your affairs whether you are healthy or not. A general DPA bestows authority for all of your financial affairs. A limited DPA restricts the authority to specific tasks or a limited time period.

You may also want to designate a healthcare power of attorney, appointing someone to make medical decisions for you. Note that not all states recognize this power of attorney.

Another important area to discuss with your financial advisor is how to title your assets. This decision can have far-reaching implications on your tax bite as well as ease of inheritance once you pass away.

Last, you will need to name an executor of your will. I served in that capacity for both my father and mother, and it is not a job I wish to repeat. It is an awesome and thankless task. So, choose carefully, and consider appointing co-executors, perhaps a family member and an objective advisor.

Certainly, planning your estate is not a fun task. After all, it forces us to confront our mortality. But if you don't do it, and do it wisely, your heirs will not easily inherit what you have worked so hard all of your life to accumulate and to preserve. So, get started. It's the New Year, a fine time to start the year off right!

Until next week…

This concludes this week's issue of Financially Fit.  We encourage you to visit our website to review past issues of Financially Fit:

http://www.brokeradviser.com/newsletter.cfm


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