If outsiders take aim at your wealth, these planning tools and strategies can help to protect your family from financial and emotional harm.
When wealthy families look to the future, one of their top priorities is finding ways to protect their assets. “It’s probably the most important aspect of wealth planning today,” says Joseph Wojcik, senior vice president of wealth and investment management for Huntington Private Bank®. “The people we work with want to protect themselves, their spouses, their children, and their grandchildren†.”
Yet many obstacles could stand in the way. After a divorce, a child’s ex-spouse could be entitled to a big chunk of family wealth. Litigation can expose family assets to court judgments, and business creditors, too, could take aim at family property. In addition to creditors and predators, taxes may present an obstacle to maintain wealth across generations. Even under the new tax law, with expanded personal and family exemptions, U.S. families were expected to pay nearly $15 billion in estate taxes in 2018‡. It’s no wonder that seven in 10 surveyed affluent families lose their wealth by the second generation, and 90% do so by the third, according to a study by The Williams Group§.
Potential errors in planning, too, could put your legacy at risk. Using the wrong kind of estate planning component to convey assets could make the transactions public, compromising a family’s privacy and exposing family members and their wealth to threats from outsiders.
Donating the wrong kind of assets could have a negative financial impact on the family and the charity by subjecting the family to unnecessary taxes and reducing the size of the charitable donation.
Simple errors in documents could leave assets under the control of those who don’t have family members’ best interests at heart. All of this can take an emotional toll on everyone from the wealth creators, whose cherished hopes may be dashed, to the intended beneficiaries, whose own future may be upended.
“We see really sad situations all too often,” says Wojcik. “Inadequate or misguided planning can shatter a family, ruin a business, and deplete an estate with payments to lawyers in endless litigation.”
The good news is that early and ongoing planning can help you avoid these mistakes and achieve wide-ranging goals. “If we know the full scope of what you’re trying to accomplish,” says Wojcik, “then we can work with you and your legal and tax advisors to find ways to help meet those goals.”
These broad goals, among others, could be at the heart of your plan to protect your legacy.
Asset protection and control
For many people, says Wojcik, a primary objective is to structure their wealth to help make it offlimits to creditors and predators, while leaving the current generation with a say in how a business is run or how family assets are used.
That can be a balancing act, because some trusts require the “grantor”— the person establishing the trust—to cede control of trust assets to a trustee.
“But with good planning, you can control assets without owning them,” Wojcik says. “You can own as little as one-tenth of 1% of an entity— an S-corp, a C-corp, or a family partnership—and still be in charge†.”
“Many people don’t understand that passing along money in their will makes it part of the public record,” says Wojcik. If someone put a bequest into a will, that information could be available to anyone looking to find out who the heirs are and how much they’re getting. “Someone who has just come into a large amount of money could be an attractive target for all kinds of predators,” he says.
A variety of trust structures can help protect assets in an estate plan from public view. Yet even then, there could be problems. “Delays in funding the trust, or assets in another state that you neglect to include, could still leave much of your estate exposed to public view,” Wojcik says.
The 2017 tax law included major changes to rules governing lifetime gifts as well as money passed along through your estate. New, much higher exemptions mean that many families no longer have to worry about gift or estate taxes, Wojcik says. “But for families with large business interests, estate taxes are still very much an issue—and not getting it right can be very costly,” says Wojcik.
He recalls reviewing one family’s trust, created to help protect and preserve a very large estate. “It was a perfectly fine trust in isolation, but it failed to take into account the full picture of that family’s circumstances,” he says. “The language of the trust opened a hole that would have lost at least a quarter of the family’s wealth to unnecessary taxes.”
Estate and gift taxes are not the only concern, notes Wojcik. “The capital gains tax is now a major part of planning,” he says. That’s because assets passed along as part of an estate may qualify for a “step-up in basis”—an adjustment, for the purpose of calculating capital gains, from an asset’s original worth to its value at the owner’s death††. A higher tax basis can greatly reduce capital gains when the asset is sold.
“That’s very significant for someone who started a business for, say, $10,000 many years ago, and now when that person has passed, it’s worth $5 million,” he says. “That step up in basis can mean substantial savings.”
But because tax laws are almost constantly changing, it’s key to revisit all tax-related aspects of an estate plan frequently with knowledgeable tax and investment advisors.
For those with philanthropic goals, there are several ways to structure charitable gifts to provide possible benefits for the family.
“For example, it might make sense to put an appreciated asset such as a building or a stock holding into a split-interest charitable trust, which lets you retain an interest in the trust as long as you’re alive and then sends the remainder to charity,” says Wojcik.
It’s also possible to use annual required minimum distributions from IRAs and other retirement accounts to make charitable gifts, using money that otherwise would be taxed as income.
Communicate and adapt
Wojcik emphasizes that none of these goals should be considered in isolation. Talking with your advisors and your family can enable you to understand and accommodate shifting needs.
He tells of a family in which the father had died, the mother was elderly, and the two daughters were concerned about the future of an extremely valuable family business.
“The situation called for a very specialized solution—the sale of a majority interest in the business to an intentionally defective trust,” Wojcik says. “But that not only saved the family millions of dollars in taxes; it also kept their family wealth safe, which should help to preserve the family’s legacy for multiple generations.”
With attention now and later to the considerations described here, among others, you and your advisors can create an estate plan that can help deploy your wealth as you have chosen, with hopefully few disruptions and maximum impact.
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