Protecting Your Wealth

Hopefully you have put together an estate plan that details how your wealth should be distributed upon death. If not, you should. For those of you who have, make sure the important financial decisions you make in the years to come don’t alter your intended wishes.

The following describes certain areas of your estate that you need to carefully monitor.

Review current wills and living trusts.

Make sure your will is current and if you don’t have a living trust, consider establishing one. Assets placed in a living trust do not escape estate taxes, yet there are many benefits. A living trust:

  1. Allows for the distribution of assets according to specific terms you designate.
  2. May help you avoid probate and costly attorney and court filing fees.
  3. Ensures you pay the least amount of estate taxes required (when the unified credit is considered).
  4. Can provide for your spouse during his or her life with the remainder of the assets going to your children, which is especially useful in second marriage situations.

Living trusts work well when they are designed and handled properly. Only you and your trusted advisors – which should include your Rea associate, your financial manager and an estate planning attorney – can help you determine if one is right for you.

Title your assets correctly.

If you use a living trust, make sure your assets are titled in the name of the trust – that’s the only way for it to work properly. And realize that “pay on death” bank, “transfer on death” brokerage and “joint” accounts can wreak havoc on your estate plan if you intended for those assets to be transferred according to your trust terms.

A typical estate plan tries to have a certain amount of assets in the husband’s name and a certain amount of assets in the wife’s name to take advantage the each person’s unified credit at the first death. If you title all of your assets jointly with your spouse, you may have altered your entire estate plan.

For example, if you own $2 million in an investment account and your spouse owns $2 million between your home and bank accounts, then at your deaths, the $4 million in assets can pass to your family free of federal estate tax. However, if the investments are in your name with a right of survivorship to your spouse, when you die, everything passes to your spouse. Now, your spouse’s estate is $4 million. When your spouse dies, he or she only has a $2 million exemption (under current law) – and now $2 million is subject to federal estate tax. That’s not exactly what you’d want to happen. (Please note this example only considers federal estate tax and each state has its own set of rules to take into consideration.)

Title real estate correctly.

Real estate, like your home, can be set up to “transfer on death” and avoid probate. Another option is putting it in your living trust so it can be administered according to the trust’s terms. Whichever options you chose, be sure to title the asset correctly.

Review your retirement beneficiary designations.

Your will does not determine how your retirement plan benefits are distributed. Rather, they are distributed according to your beneficiary designation, which must remain current. Let’s assume you have designated your spouse as your plan beneficiary. The two of you divorce and you never change your beneficiary designation. Who gets the money when you die? Your ex-spouse. If that’s not what you intended, make sure each and every retirement account is up-to-date.

Protect life insurance.

Life insurance proceeds are subject to federal estate taxes, but may escape Ohio estate taxes. If you have a large estate, it may make sense to have an irrevocable life insurance trust own the life insurance policies. That way the proceeds will escape federal estate tax at death, resulting in a significant savings.

Let’s assume you have a life insurance policy that pays $1 million at your death. If subject to federal estate tax, the tax on the proceeds could be roughly $500,000. However, if this policy was held in an irrevocable life insurance trust, your heirs could receive the full benefit.

Nothing is more frustrating than going through the process of setting up an estate plan, only to have it not work properly because of a simple oversight. Work with your trusted advisors to develop the best estate plan for you and your loved ones. Remember to review your documents every couple of years to be sure the plan still meets your needs, especially in light of the ever-changing tax laws.

This article was originally published in The Rea Report, Winter 2008.

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.