Planning for Future Generations
By Wickham Boyle with Lisa Brandes
Preserving wealth for your family is a worthy goal, and by creating a good intergenerational financial plan it is possible to transfer both your assets and your values to future generations. In doing so, you can help your dear ones lead more fulfilling lives.
But all the new information and restrictions on estate taxes can be confusing. In 2006-2008, you can leave up to $2 million, tax-free, to your heirs. This estate-tax exemption is scheduled to increase to $3.5 million in 2009. Unless Congress repeals the federal estate tax altogether (the House has approved a permanent repeal, but no one knows for certain if legislation will pass the Senate) the tax will disappear in 2010, only to reappear the following year with an exemption threshold of $1 million.
One way to compensate for this uncertainty is to move assets out of your estate by maximizing your gifting strategy. Right now you can make unlimited, tax-free gifts to a spouse as long as he or she is a U.S. citizen; also to charities. You can make tax-free gifts of up to $12,000 per individual to your children and grandchildren (or to certain trusts established for their benefit). Before you make any gifting decisions, it is important to clarify your goals and values.
Create a “Family Mission Statement”
Start by taking a long look at what is most important to you when planning transfers. If you think it might be helpful to discuss these ideas with other family members, consider scheduling a weekend retreat. Even if no “right answer” or fully developed strategy emerges from these discussions, it can be useful to focus on family relationships and goals, spiritual beliefs, charitable intentions, and the desire to impart a work ethic to beneficiaries. Take, for instance, Warren Buffet’s recent huge gift to the Gates Foundation. It bypassed his children, leaving their foundations a mere billion dollars apiece, and Buffet says his children always knew of his wishes, and approved. A “family mission statement” may be derived from these deliberations, and can be updated every few years.
Draft Legal Estate-Planning Documents
It’s important to have legal documents drawn up that are compatible with your “family mission statement.” Without a will to indicate your wishes, a court distributes your property according to the laws of your state. And chances are good that these laws may not conform precisely to the wealth transfer strategy you have in mind.
Wills are not the only estate-planning instruments that people tend to ignore. Consider meeting with an experienced estate-planning attorney to discuss your specific needs for documents such as trusts, powers of attorney, and directives for medical treatment.
And Speaking of Trusts …
For some, the term “trust-fund baby” conjures up images of spoiled children. In reality, a trust may help instill your values in your children and grandchildren – thereby preventing them from making undesirable choices.
A trust is a financial entity, or tool, that is created for the purpose of holding certain assets. Because of its flexibility, a well-designed trust can shape the distribution of your assets in any number of creative ways. For example, allotments to beneficiaries can be set at modest amounts, or left to the discretion of a managing trustee. Whereas, if you make outright bequests, your descendants might go through their inheritances quickly, squandering their money or investing foolishly.
For this reason, so-called “incentive trusts” have become popular in recent years. Such accounts offer rewards to beneficiaries who accomplish certain goals, and financial incentives can be specified for anything you deem important. Beneficiaries might receive specified sums for completing higher-education degrees, running a family business well, attaining pre-set levels of earned income, or serving in the community.
Selecting a Trustee
One trust-fund approach, as mentioned previously, is to leave distributions to the discretion of a trustee. The trust might indicate what types of activities are to be rewarded, allowing the trustee to distribute sums as she or he deems appropriate. In this type of an arrangement it is crucial to choose a highly qualified trustee. Whether it is a relative, a friend, or a professional advisor, your trustee should be able to empathize with your beneficiaries yet make prudent decisions about trust-fund distributions. Moreover, your plan should include a back-up trustee should your first choice become unable or unwilling to serve. For long-term trusts, a qualified institution might provide the needed continuity.
There is no set formula for creating a good intergenerational financial plan. But given the appropriate information, guidance, and outlook, you should be able to create a plan that embodies the goals you have for your cherished ones and their future.
