Inheritance
Issues
The number of millionaires next door in this country is nothing short of
staggering. As of mid-year 2003, there were 3.8 million households with
more  than $1 million in investable
assets. This does not include the value of retirement plans or of
personal residences. If these asset
categories were considered, then the number would be 7.9 1
million
households. Amidst this unprecedented prosperity, the single wealthiest
generation is preparing to transfer an estimated $7 to $10 trillion
dollars to its heirs (depending on the source quoted).
What will become of this wealth? How much will
be unnecessarily lost to death taxes? Will heirs squander their
inheritance or perhaps lose it to their divorces, lawsuits and
bankruptcies? Fortunately, proper estate planning can preserve your
wealth from unnecessary death taxes and even perpetuate it for
generations.
Death
Taxes
Few Americans accumulate wealth without careful
income tax planning each year. If you ignore available tax shelters,
deductions and credits, then you only enrich the IRS...and shortchange
your own net worth. Remember: It is not how much you make that counts,
rather it is how much you keep.
A married couple may lawfully protect up to $3
million 2 of their assets from federal estate taxes through proper
estate planning. However, if your plan includes the joint ownership of
assets between spouses, with reciprocal beneficiary designations and
simple, Sweetheart Wills, then you likely are shortchanging your
loved ones and unnecessarily enriching the IRS. In fact, on an estate of
$3 million, the unnecessary death taxes could exceed well over $600,000.
Inheritance
Protection
Assuming your hard-earned assets escape
unnecessary death taxes through proper planning, all may be for naught
unless you protect the inheritance both from
your heirs and for your heirs.
First, no one values the worth of a dollar like the person who earned
and paid taxes on it. Second, inherited wealth has a tendency to attract
problems, especially if that inheritance remains unprotected.
Whenever someone lacking financial maturity
receives an inheritance, it is often good news for sports car (usually
red in color) salespeople, travel agents and high-end electronics
dealers. Is that how you want your hard-earned wealth consumed? Even
worse is the potential damage to your heirs. Andrew Carnegie, one of the
wealthiest industrialists of the late 19th century observed
that "[t]he parent who leaves his son enormous wealth generally
deadens the talents and energies of the son."
Inherited wealth tends to attract problems like
steel to a magnet. Couples that can weather financial poverty may
divorce over inherited financial prosperity. Lawsuits against deep
pocket defendants have become almost a national past-time in our
court system. While divorces, lawsuits and bankruptcies can strike any
family at any time, proper inheritance protection planning may prevent
your wealth from being taken. Without proper planning today, the past,
present or future creditors of your heirs will come after your wealth
tomorrow.
Discretionary
Trusts
When your wealth is distributed to your heirs
either outright or in chunks (e.g. different percentages or
fractional shares distributed outright at specified ages), it may be
lost to any of the problems discussed above. Whether created under your
Last Will & Testament or under your Revocable Living Trust, a
Discretionary Trust may help protect your wealth for and from your
heirs.
Generally speaking, under a Discretionary Trust
a Trustee of your own selection administers and distributes your wealth
for your heirs. The terms of the arrangement can be loosely or tightly
drafted depending on the degree of inheritance protection you want. In
addition to protecting the inheritance for and from your heirs, you may
exempt a significant amount of your wealth from yet another round of
death taxes in the estates of your heirs.
Summary
This has been a brief, general overview of an
extremely complex topic. As always, qualified legal counsel should be
sought to evaluate your options to perpetuate your prosperity.
1
Source: NFO World Group
2 The future of this estate tax
exemption amount is uncertain under current federal tax law and many
states are even imposing their own estate taxes, independent of any
federal estate taxes. Accordingly, careful monitoring of the economic,
political and legal climate is required.
Affluenza
Antidotes
The condition has been called affluenza. While it can afflict
people of any age, acute symptoms tend to be most pronounced in younger
victims.  These
acute symptoms, if left untreated, can become chronic and debilitating
for life. A quick glance at the tabloids in the grocery checkout lane
will confirm this fact.
Affluenza is commonly transmitted by an
inheritance of wealth, often killing the incentive of its victims to
become productive citizens and reach their full potential in life. One
increasingly popular antidote to affluenza is the Incentive Trust.
As billionaire Warren Buffett reportedly said, regarding the inheritance
he plans to leave to his own children, "[t]he perfect inheritance
is enough money so that they feel they could do anything, but not so
much they could do nothing."
Incentive
Trust Antidote
An Incentive Trust, as the name implies, is one
in which the Trustmaker sets standards of conduct or achievement that
must be met before distributions are made to or for the benefit of a
beneficiary of the Trust. These standards may include such incentives as
completing a certain educational level, becoming self-supporting through
gainful employment, volunteering for charitable causes supported by the
Trustmaker and even avoiding drug/alcohol abuse.
However, Incentive Trusts may not include
provisions that are considered contrary to public policy. Such
provisions include those that may disrupt family relationships by
encouraging separation or divorce, foster neglect of parental
responsibilities, prevent marriage and discourage the performance of
public duties. Otherwise, the scope of permissible incentives is limited
primarily by your creativity as the Trustmaker.
Communicate
for Continuity
Effective communication of your Incentive Trust
objectives can help prevent future litigation between your Trustee and
your heirs, especially over the requirements you establish for
distributions. Some families hold financial planning retreats for their
intergenerational members to communicate the Trustmaker's objectives. At
these retreats, family members may prepare a written statement of their
family values, a family code of conduct and/or a family mission
statement. Oftentimes, the Trustmaker's professional advisors attend the
retreat and educate family members about the investment, tax and asset
protection benefits of the Incentive Trust. This can help ensure the
continuity of your philosophy of wealth accumulation, management and
distribution for heirs.
Alternative
Antidote
Perhaps you are opposed to influencing the
behavior of your heirs after your death, but don't want your wealth
subject to their squandering, divorces, lawsuits or bankruptcies. If so,
you should consider the Discretionary Trust alternative.
The key to a successful Discretionary Trust is
selecting and entrusting an appropriate Trustee with broad discretionary
authority to protect your wealth for and from your heirs. The position
of Trust Protector can be created to appoint and even remove a
Trustee to ensure fulfillment of your objectives, whether the Trustee is
too generous or too restrictive.
Conclusion
Help ensure that your financial legacy will be
a blessing. Take time now to design an estate plan that encourages your
heirs to use their future inheritance wisely.
Copyright © 2005 Integrity Marketing Solutions. All rights
reserved. Some artwork provided under license agreement. This
publication does not constitute legal, accounting or other professional
advice. Although it is intended to be accurate, neither the publisher
nor any other party assumes liability for loss or damage due to reliance
on this material.
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