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October Goal: Preserving Your Estate -- A Guide to Transferring Wealth

October Goal: Preserving Your Estate -- A Guide to Transferring Wealth

| October 12, 2017

“The greatest wealth transfer in U.S. history will take place from 2007 to 2061.  During this time frame, approximately 93.6 million U.S. estates will transfer an estimated $59 trillion.”
          - Center on Wealth and Philanthropy at Boston College

Are you planning on transferring wealth to your loved ones? Perhaps you will be the recipient of an inheritance?

Put a plan in place to protect your estate.

Regardless of how much you have to transfer, diligent planning can help get the most of your estate to the next generation. Take action while you are healthy, so emotions don’t get in the way of sound decision making.

Consider three major factors that can affect the worth of your estate: health care costs, tax implications, readiness and maturity of your heir(s).

Many people underestimate the cost of their future health care needs. However, if you are nearing or are already enjoying retirement, one of the largest expenses in your lifetime may be right around the corner. Rising health care costs can quickly diminish the value of your estate.

According to Healthcare Bluebook, the fair price of a total knee replacement in Oklahoma is $28,539. If your insurance pays 80%, you’re looking at a $5,700+ bill. Knee replacement is around the same price. If pneumonia causes hospitalization, and your insurance will cover 80%, get your checkbook ready for that out-of-pocket cost of nearly $1,430.

Most long-term care expenses are not covered by Medicare. Consider purchasing long-term care insurance to help offset the out-of-pocket cost for extended health care services. Stay tuned for more on long-term care insurance in next month’s blog.

 “The median cost for home health aide in Oklahoma is $4,004 per month. The median monthly cost of a private room in a nursing home is $5,293.”
          - Genworth Financial, Cost of Care Study

If you have more money than you can spend in your lifetime, you may want to consider giving some of it away while you’re still alive.  Doing so will reduce the value of your taxable estate. You can also begin to prepare your heirs for their inheritance.

Gifting should be considered as part of your overall financial plan.

Before deciding to gift money:

  1. Consider tax implications.
  2. Ensure you will have enough money to pay for long-term care as you age.
  3. Avoid giving too much at once.
  4. Talk to a professional advisor, so you don’t suffer unintentional consequences.

While the market has been stable for a long time, the future is uncertain. Don’t unwittingly put your heirs in a position to have to support you later in life.

Too many people diligently save throughout their lifetimes, only to have their hard-earned wealth squandered when they pass away.

Build a foundation of healthy financial habits from an early age. Show your children and grandchildren the value of good work ethic, proper money management and discipline.

“How we handle money is connected to our unique family histories, including habits and beliefs we picked up from our parents, siblings and childhood experiences.”

Discuss your wishes with your loved ones in regard to the inheritance they will receive. Set a tone of empowerment, not entitlement.

You can start out slowly by giving your heirs a small gift. See how they use the money. Will they save or invest it, or will they make a large, unnecessary purchase?  Consider opening an IRA account on their behalf, and match the money they invest. Train them to use their money wisely while you’re still around.

“As much as 70 percent of people who are abruptly flooded with cash lose all the money within a few years.” 
         - The National Endowment for Financial Education

If you are concerned about your loved ones’ ability to handle the money they will receive, you can control access to their inheritance through a living trust. Consider adding directions to your trust to pay out portions of your estate incrementally, over a period of years.

Introduce heirs to your financial advisor, so he or she may assist your loved ones in carrying out your wishes after you pass away. Your financial advisor can also help prepare your loved ones to receive their inheritance by fostering positive money management habits while you’re still around.

Two types of taxes may be assessed against a person’s property and other assets when he or she dies: estate taxes and income taxes.

Proper planning can help minimize tax liability and maximize the money left for your heirs. Decisions you make now will affect who gets the majority of your assets when you pass. It’s between the IRS and your heirs. Who will you choose?

There are many ways to give without incurring a gift tax.

Give a cash gift of up to $14,000, per person, per year, tax-free. You may also make unlimited payments directly to your loved ones’ educational institution or medical providers without incurring the gift tax. By giving the money while you are living, your heirs will not be responsible for the taxes assessed on the gifts they receive from you.

Those with a high net worth may consider many forms charitable gifting. Set up a legacy through an alma mater, or give to a political organization, an arts program, or other private foundation. You may specify exactly how the money is to be used by the organization. Example: scholarships for female athletes.

It is often more advantageous to transfer stocks, bonds, and mutual funds to charity, than it is to give a cash donation. Why? You may receive an income tax deduction for the stock’s fair market value on the day you gift it. Furthermore, you do not have to pay capital gains tax on any earnings associated with the accounts after transfer. This strategy may allow you to increase your charitable donation, as you may qualify for much higher tax deductions.

In 2017, an individual can give away up to $5.49 million during his or her lifetime without owing any federal tax. Couples can leave up to twice that amount, without owing any federal tax. Keep in mind, some states may have their own estate tax regulations. (Oklahoma is not one of them.)

Use caution when making large gifts, and take advantage of current-year tax deductions. Talk to your financial advisor and your tax professional about your situation before moving forward with your plan.

There are some fundamental estate management principles that can enable you to manage your financial and personal affairs during your lifetime and distribute your wealth after death.

Trusts provide detailed instructions for how and when your assets are to be distributed to children and other beneficiaries. Trusts may also help minimize estate taxes. A revocable trust document ensures privacy, and is much more difficult to contest than a will.

A will is the cornerstone of your estate. This document can direct how your wealth and property are to be distributed. Ensure that your will is up-to-date, as it will express your wishes for any holdings outside of your trust when you die. If an individual dies without a will, it’s up to the state to decide how their assets will be distributed.

Before moving forward with a will or a trust, consult with a professional who is familiar with state rules and regulations associated with these complex documents.

Life insurance can play a critical role in your estate management – particularly when used in conjunction with a trust. Life insurance can provide money to pay for estate expenses. Policies may also be gifted.

Life insurance may be an inexpensive way to replace assets given to charity. Obtain a life insurance policy through an irrevocable life insurance trust, and designate the charity as the beneficiary. The life insurance policy will expand the estate, so your heirs still receive a significant share. Death benefits will not be included in your estate.

There are many variables to consider before implementing a strategy involving life insurance. A trusted advisor can customize your plan, helping you to determine cost, availability, and possible income tax implications.

Proper planning can help you preserve the assets you’ve spent a lifetime building. A carefully designed wealth transfer strategy can protect your spouse, children and other heirs, and ensure that your assets are distributed how and when you want them to be.

Start the process now, so emotions don’t get in the way of sound decision making. Pay attention to health care costs, tax liabilities and the maturity of your heirs. These factors can have a major impact on the value of your estate. 

Protect your wealth for future generations. Work with a professional team of advisors, including a certified financial planner, a tax professional, and an estate planning attorney, to implement a strategy that will minimize tax liabilities and leverage gifting opportunities.

Call us at 405.767.1230 for more information.