Preserving Your Legacy through Tax and Advanced Planning Techniques

Over the past 10 years alone, it is estimated that the tax code has been amended or revised more than 4,000 times^†.

And unless you have a crystal ball, it’s difficult to know what new direction Congress may take 90 days from now, let alone a year from now.

For high-net-worth individuals, the challenges are even greater because more money means potentially more complications and more decisions. Plus, the consequences of those decisions are magnified. That’s why sophisticated tax and financial planning is essential to help manage, grow, protect and transfer high net worth, despite all the uncertainty.

“More money, more problems. That’s an expression that is completely appropriate when talking about tax issues for high-net-worth individuals,” says Dan Griffith, senior vice president and director of wealth strategy for Huntington Private Bank^®‡. “If you’ve accumulated a lot of assets, there are a lot more moving parts to keep track of and consider when making long-term plans. You’re likely so busy working to keep those assets growing that there is little time to focus on the best options for protecting them or, eventually, transferring them to future generations^‡.”

According to Griffith, a major first step is getting people to recognize problems, as well as opportunities, they didn’t even know they had^‡. Often it’s a major life event that gets people thinking. It could be a death in the family, the birth of a child or grandchild or an upcoming extended vacation. The trigger for starting the process is different for everyone but, at some point, advanced planning needs to become a priority.

Identifying someone you trust to guide you on the journey is critical. Griffith notes that many high-net-worth clients are skeptical of advice they may receive because they’ve learned that a downside of accumulating a degree of wealth is that there are lots of people who are eager to try to take it from you^‡.

Ideally, you ultimately select a team of advisors made up of attorneys, accountants, bankers and others who will all work collaboratively on your behalf to offer effective, creative solutions.

Tips for Transferring Wealth

An area of increased focus in recent years is charitable giving.

"We see a lot more people today who are interested in giving back to the community that helped them build their wealth,” says Ed Morrow, senior wealth strategist for Huntington Private Bank^§. “Even if they have children, they may choose to not leave 100% of their assets to them, preferring that a portion goes to charitable organizations that can make a positive impact. This trend helps to explain the recent growth in the number of foundations^§.”

For clients who do choose to leave much of their wealth to their children, there are many options and decisions to be made to potentially limit tax liabilities and protect the assets for the next generation. A dynasty trust, for example, is an increasingly popular long-term trust that does not have a set ending date such as when a beneficiary reaches age 25 or 30. It is more common now to give beneficiaries increasing rights, access or distributions at certain ages, but not to terminate completely. This is often done to protect children’s inheritance from a potential divorce one day as much as it is to save estate tax or protect from outside creditors. According to CNBC, only 40% of parents plan to leave their children some type of inheritance^¶.

Common Mistakes with Tax & Estate Planning

No two families or financial situations are exactly alike. Still, a lot of similar mistakes are made, including:

1. Failing to plan or not planning early enough. The earlier you start planning, the more options you have. Some tax savings techniques cannot be accomplished right before or after death. The best decisions are made when you have the time to carefully consider all the implications.
2. Choosing the wrong advisors. So many people become paralyzed in their decision making, not even knowing where to start their journey or who to ask. They may involve professionals who helped them early in their careers but who lack the expertise to handle more sophisticated, complicated plans.
3. Giving too much control too soon. Many trusts today are set up so that children or grandchildren can get full access to their inheritance when they reach the age of 21, 25 or 30. Few 21-year-olds, however, have the maturity, knowledge or foresight to properly manage sizeable assets. There are better options that provide income without full immediate access, while also retaining estate and asset protection advantages.
4. Underestimating what’s required. Everyone wants a simple estate plan. But simple may not be comprehensive enough to adequately address all scenarios and implications.
5. Overestimating the burden. By contrast, some fear they need every last piece of data or variable figured out before they start the process. Don’t let the perfect be the enemy of the good. Often the greatest plans start out by addressing one small step at a time.
6. Thinking your planning is done. With the constant volatility of tax changes, it’s critical to continually review and update estate plans to ensure they are still relevant and optimized for current realities.

Stay informed

No one knows exactly what tax changes will happen down the road, but it’s important to have an advisor who is keeping a pulse on what is happening in the tax world to be able to respond quickly with actions and alternatives that are in your best interests.