By Amy Sbrusch, Tax Manager
“All good men and women must take responsibility to create legacies that will take the next generation to a level we could only imagine.”
~ Jim Rohn, Entrepreneur and Business Philosopher
As life unfolds and businesses evolve, the accumulation of assets grow, from home purchases to retirement accounts and annuities, to cash in the bank. A certain amount of planning is necessary with respect to transferring such assets to the next generation—either during or after your lifetime. The complexity of the plan will vary depending on the potential size of your estate and your family dynamics. This article points out some of the things to consider as you navigate the process of leaving a meaningful legacy to your children and grandchildren.
Traditionally, estate planning was a private matter discussed between spouses, if at all, leaving close family members in the dark until the reading of the will. Nowadays, it is encouraged to involve children and heirs in the conversation sooner, sharing more information as they mature so that they know what to expect. This is both an educational and preventive measure guarding against misinformation, surprises and disappointment later on. It’s also an opportunity to openly discuss your wishes for the future and explain the rationale behind your decisions; thus, minimizing drama after you’re gone.
Thoughtful planning is required to ensure equitable distribution of assets among your heirs. If details are vague or seemingly unfair, there is more chance for misinterpretation and even squabbling among siblings. Cash distribution is the easiest to split into equal percentages. Real estate and other hard assets or business ownership can be more difficult and might come down to personal preferences or passions; e.g. Which of your children enjoys the lake house most? Does your oldest son have the skills and desire to take over running the business? While different assets may not match dollar for dollar, they can be offset by taking out equal value life insurance policies (not taxable in the estate if a child is the beneficiary) or leaving items of same or similar value to other children.
If your children have had the good fortune to achieve their own high net worth and, therefore, don’t require as much monetarily, you may instead consider focusing on your grandchildren by setting up a trust specifically for them. This is a way to extend your legacy across multiple generations.
Be mindful if you have a child with problematic issues such as over-spending or drug/alcohol habits you don’t agree with. To work around such issues, consider putting money in a managed trust account that limits disbursements each month or year. Seeking professional advice can help with making these tough decisions.
There is no need to wait when it comes to transferring wealth, and many do opt to pass on some of their assets while still alive. If you have an asset that will appreciate greatly in the next 20 years, for example, it’s better to gift it now to lessen the taxable estate amount later. It’s best to ask your CPA about how this will impact both parties before taking action.
If you own your business, it’s important to have a succession plan in place from day one. This might involve naming one of your children, should they be interested, to take over if you become incapacitated or upon your demise. Or, you may prefer to sell the business when you get older, either to a partner, through buyout or to a third party. Proceeds from this type of transaction can be converted into cash or invested, continuing to grow in value until later passed to your heirs.
It’s a good idea to discuss with family members the “what-if scenarios” that can unexpectedly diminish life savings, such as an accident taking you out of the workforce, medical costs for an extended illness or end of life care. Also, the longer we live, the more money we need to simply survive, in which case our children may not get as much as they thought. Having this realistic conversation addresses the tendency to take things for granted as to how much inheritance can be counted on.
In cases of high net worth, it’s helpful to engage the services of a professional tax consultant well versed in legacy and estate planning to act as a mediator when having what can be sensitive family conversations. They can ask questions like, “What would you rather have, the house or money?” They can also explain tax consequences and how to avoid the burden of high estate taxation that would otherwise fall on your offspring. For continuity and wealth protection, it also makes sense to introduce the next generation to your CPA, since they will no doubt need a wealth management expert following their inheritance. And because this is an iterative process, it’s also advisable to meet again before plans are finalized.
There are no clear-cut answers when talking about the transfer of wealth you have built over a lifetime. There are as many different scenarios as there are families, but one rule of thumb is to start thinking about your legacy when your career and family are still young. Because this process can be complex with potential twists and turns as things change, modifications will be necessary along the way. Weinstein Spira can help you figure it out.