Donald Trump's election has fueled speculation that estate planning will become an antiquated activity and profession. But while the President-elect has claimed that he will end the "death tax," what that means exactly remains unclear.
Keep in mind that estate planning is flourishing at the moment and benefiting the majority of us even though less than 1% of the families in the United States will ever have a taxable estate. Currently, the estate-tax exemption is $5.45 million per individual or nearly $11 million for a couple. That means only about 2 out of every 1,000 estates would be subject to the estate tax now. Thus while estate planning for the ultra-wealthy currently focuses in part on minimizing estate taxes, true estate planning for the rest of us is about much more.
The core value of estate planning is to help people ensure that the wealth they've created will impact their families and the world the way they want it to!
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I have had numerous discussions with families that will never have a taxable estate yet they are passionate about wanting their lifetime of wealth building to accomplish what is important to them.
Even those few families who would be subject to the current estate tax may find that, if it is repealed, they might then face a potentially greater income tax given the potential elimination of the date of death valuation adjustment. Currently, it is estimated that 55% of all taxable estates are comprised of assets with unrealized capital gains, which could be taxed at capital gains rates as opposed to just estate taxes. While this is effectively a 50% reduction in tax rates, it will impact future generations and their tax planning as well.
Estate taxes aside, a well-drafted and thought-out estate plan should deal with multiple issues that can have a lifetime impact on future generations and their income taxes and philanthropy, as well as the development of their value systems and personal sense of accomplishment. Estate planning is essentially the implementation of a strategic family plan that continues after death.
The following are just a few of the issues that an estate plan should address and some of the benefits planning can accomplish:
Your Goals
The core starting point is figuring out what you want to accomplish with your wealth remaining at your death, whether that includes catering to your philanthropy, family or both.
How to Pass Wealth to Family
If you're leaving your wealth to family members, what is the smartest way to do so? Outright? Or would an asset protection trust or other mechanism or structure be more appropriate to protect assets from predators?
Your Beneficiary Requirements
What details or requirements would you like to lay out for your beneficiaries? For example, is there an age you feel is appropriate for giving away control? Would you want to direct the money be put toward specific uses or goals, such as education, business or health needs?
Income Tax Consequences
What are the income tax consequences and associated issues of bequests? This might include dealing with retirement plan assets and related future income taxation, low basis stock issues (especially if the date of death step-up in basis is eliminated) and unique assets such as partnership interest, business assets, real estate, hedge funds, oil and gas interests and more.
Philanthropy
What are the family's philanthropic goals? How can you make the greatest impact to achieve such goals? What is the most income tax efficient way to fund your philanthropic goals? You might be inclined to consider structured gifts over outright giving or whether you'd like to set up a private foundation or donor-advised fund. Whatever your methods, incorporating philanthropy into your estate plan can help pass on a sense of altruism and social compassion, as well as financial resources, to the next generation.
Business Succession
A strategic estate plan also will deal with business continuity and succession planning. You should determine how to best pass on your business to heirs or plan for an orderly sale and transition to others. Your plan should ensure the maximization of wealth and cash flow after your business succession or sale.
These are just a few issues that need to be considered when doing strategic estate planning, and none of these have to directly do with estate taxes. Thus estate planning is not dead but rather may be taking a strategic turn away from focusing on estate taxes and more on achieving family goals and aspirations.
As the chief wealth officer, Andrew Bass is responsible for all strategic financial and life management services of Telemus. He works with high-net-worth members to ensure their financial life plans are designed to achieve realistic goals in both the short and long term.
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. This commentary is a matter of opinion and is for informational purposes only. It is not intended as investment advice and does not address or account for individual investor circumstances. Investment decisions should always be made based on the client's specific financial needs, goals and objectives, time horizon and risk tolerance. The statements contained herein are based solely upon the opinions of Telemus Capital, LLC. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice. Information was obtained from third party sources, which we believe to be reliable, but not guaranteed.
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