Understanding Wealth Transfer Planning

Despite several common misconceptions, wealth transfer planning is not limited to certain age groups, levels of wealth or stages of life.

LEARN MORE: “Creating A Comprehensive Financial Plan” provides insights on handling succession and weatlh transfer planning decisions for your family or business.

People have many misconceptions about wealth transfer planning. Ideally, wealth transfer is a lifelong process of allocating your wealth to provide for and protect the people you love. For the charitably inclined, it is also an opportunity to benefit the broader community and establish a tradition of giving.

Yet, despite the importance of understanding and implementing a carefully crafted plan, for many people the fundamentals often remain unclear.

GET OFF TO AN EARLY START
A common misconception people often have about wealth transfer planning is that they have not accumulated enough wealth or are too young to need a plan. According to Delrose Ann Koch, a Wheaton, Ill.-based estate planning attorney, estate planning applies to virtually everyone, regardless of means or age.

“As soon as an adult begins to acquire substantial property, he or she should consider executing a will and basic living trust,” she says. “Young married couples should sign wills establishing guardians for their minor children, as well as a simple trust within the will that would provide for life insurance proceeds and any other property to be managed for the minor in case both parents would pass away.”

DON’T LET DISCOMFORT STOP YOU
Unfortunately, it’s the concept of passing away that often discourages people from creating a wealth transfer plan, says Ray Odom, director of wealth transfer services at Northern Trust.

“A very basic challenge of traditional notions of estate planning is its association with death,” he says. “And it’s understandably hard to make death planning a high priority for anyone.”

But the sooner you put a plan in place, the greater the protection for family members who would otherwise be forced to make choices for you without your input. Timely planning allows time for you to fully implement your plans and gives you a head start toward meeting your objectives.

ALLOW YOUR PLAN TO EVOLVE
Another misconception is that once you have established a wealth transfer plan, you don’t need to revisit it. But as time passes, your personal situation likely will change, and your wealth transfer plan should be updated to reflect those changes.

“An individual’s life circumstances can change dramatically over five or 10 years,” Koch says. “That individual may marry, divorce, have or adopt a child, become disabled, earn considerable wealth, lose considerable wealth, establish a business, acquire complicated investments, or federal and state tax laws may change. All of these factors — and many others — may trigger changes in an individual’s or a couple’s estate plan.”

To ensure your plan continues to accomplish your objectives, your advisors should review your documents every three to five years, Odom says. “It’s especially important in the current environment of legislative and political change.”

DON’T FEAR THE CHANGING LANDSCAPE
Because tax law is constantly changing, and likely will undergo revision when the new president takes office, many people are hesitant to begin the wealth transfer process. But dying without a plan — or with one that does not reflect the current laws — can be very costly. Tax law is fluid by nature, changing constantly as new social and fiscal policies emerge, and estate tax law is no exception. In fact, there have been several major revisions since its enactment in 1916. However, according to Koch, a good estate planning attorney will try to anticipate and address such changes in your plan.

“Current estate planning documents use formula clauses that take into consideration changes in the amount of the exemption from the estate tax, as well as what should happen at the client’s death if the estate tax has been repealed, or is still in existence,” she says. “The use of a trust protector clause, which is a paragraph or section in a trust that may give power to an unrelated third party to amend the trust document under certain circumstances, such as major changes in the tax laws, also can provide needed flexibility.”

MAKE THE INVESTMENT
A good wealth transfer plan is well worth the time and financial investment. While you will need to hire skilled professionals to develop, implement, manage and administer your wealth transfer plan, these expenses are necessary and will only add to your peace of mind. “The simple truth is that we fail to realize that having conversations today about future wealth transfers can enhance our relationships with others today,” Odom says. “It can create a new level of peace of mind and preserve our personal, family and social values.”

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