Planning to Leave a Family Legacy? Why Writing a Will Is Not Enough

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About 20 years ago, when you first drew up a will, you decided to leave the lake cabin to your daughter, and your sailboat to your son—both to be passed on to them upon your death. And you haven’t touched the will since.

But what if you’ve remarried, and now have two step-children? What if the sailboat is long gone, and now you feel passionate about leaving an endowment to the nonprofit where you volunteer?

In the coming years, an estimated $3.2 trillion in assets is expected to transfer from one generation to the next in the United States. Our Wealth Transfer Report, produced with research partner Scorpio, highlights the importance of preparing for the coming shift in generational wealth. It’s increasingly important for families to ensure that the plans they’ve laid out for the transfer of their estate keep pace with their ever-changing lives.

Of the 1,235 Americans surveyed, slightly more than half, or 54 percent, have a will in place, but only 30 percent have a full wealth transfer plan. There’s no question that a will is a good place to start. But in many cases, it may not be enough to adequately distribute family assets, preserve family wealth, and create a long-term legacy that reflects the family’s values and wishes for future generations.

Our research underscores the importance of having a comprehensive wealth transfer strategy. The way that wealth is passed on can greatly affect how long a family legacy will last and how meaningful it might be.

More than a simple will

A will is often sufficient for an individual with a small estate and no extenuating circumstances, says Catherine Walker, a senior trust consultant for RBC Wealth Management-U.S.

A will is a matter of public record, meaning anyone can access it, and it can be contested in court.

But there are limitations to a will. For instance, “a will can’t preserve wealth for multiple generations, or determine how and when distributions occur,” says Walker.

Another limitation is that a will can be easily forgotten. Typically, the document is stored away and doesn’t get revisited or revised as life evolves, says Malia Haskins, a wealth strategist for RBC Wealth Management-U.S.

That’s one of many reasons why RBC Wealth Management strategists advise people with large estates, large families, blended families or special situations to create a comprehensive wealth transfer plan. It should encompass all facets of an estate — everything from real estate and securities holdings to business and philanthropic interests.

A comprehensive wealth transfer plan should, at the very least, include four key documents: an up-to-date will, a revocable trust, a power of attorney, and a health care directive. As the American population ages, issues around health and long-term care should be addressed in estate planning conversations.

“A lot can happen between now and death,” cautions Haskins. “Planning is even more important if parents are concerned about heirs’ ability to effectively manage inheriting wealth, whether due to family responsibilities, or impediments such as health issues or addictions,” she says.

“If your heirs are young children and you don’t know what the future holds, you can create a trust to protect the assets until they reach a certain age,” says Haskins. Trusts give parents an added level of control by allowing them to stipulate when and how the children receive their assets, and even what conditions might disqualify them from inheriting.

Parents who transfer assets to a revocable trust avoid probate and retain full control. They are able to make changes to the trust which, upon their death, converts to an irrevocable trust that cannot be altered. Assets put directly into an irrevocable trust are no longer part of the estate and aren’t subject to estate tax.

Walker helps clarify the distinction between a will and a full wealth transfer plan. “A will says who gets what, but a trust says who gets what, when, where and how,” says Walker. A will, which is a public document, can be embedded within a trust, which is private, rendering the contents of the will private as well.

Methods of wealth transfer

People with comprehensive wealth transfer plans commonly use multiple methods and structures to pass on their wealth. Legacy planning and philanthropic techniques – such as estate freeze trusts, generation skipping trusts and charitable giving vehicles – can reduce the size of a benefactor’s taxable estate, minimize taxes, and protect assets left to the next generation.

Parents can also establish trusts for specific purposes, such as provisioning for the needs of a disabled child, or a keeping the proceeds from a life insurance policy out of an estate, in order to give beneficiaries the liquidity to help pay estate taxes.

If parents are interested in preserving their wealth for multiple generations, they can set up a dynasty trust. Assets in the trust will be distributed to children for life, with remaining assets going to grandchildren or later generations. The transfer of generation skipping property can be subject to an additional tax. Some states also limit the duration of the trust.

A limited liability company (LLC) is a good option for property and investments that are difficult to divide among multiple beneficiaries, says Haskins. Assets can be put into an LLC, in which the benefactors and beneficiaries become shareholders.

Another option is a life estate, which is employed in second marriages where the husband wants his new wife to continue living in their home after his death, but the house will pass to his children when she dies, says Ringham. A qualified personal residence trust is similar, but the right of use is limited to a certain number of years.

If people are passionate about a cause, they can create a long-term philanthropic strategy using different types of trusts, a private foundation, or a simpler donor advised fund. A foundation is a good choice for benefactors who want to donate a large gift, exert greater control, or ensure long-term family involvement.

Preparedness breeds confidence

Given the pace of change in many people’s lives, wealth transfer plans can quickly become outdated. Parents should review and revise their wealth transfer strategy at least once a year as circumstances change. For instance, a business succession plan, or long-term care arrangements for a child with special needs are two types of plans that people should revisit annually, says Bill Ringham, vice president and senior wealth strategist at RBC Wealth Management-U.S.

Think of a plan as a guide for your heirs, says Ringham. For many people, receiving an inheritance is their introduction to wealth. For that reason, a good estate plan should anticipate the questions that a first-time inheritor might have about fulfilling their benefactor’s wishes and carrying out their responsibility. It’s likely that inheritors will want to know, “Do I need to pay taxes on these assets?” or “Does my benefactor have a financial advisor who can help determine how to manage the inherited assets?”

Indeed, our report found a strong correlation between a person’s degree of preparedness and the confidence they have in their heirs’ ability to maintain their legacy. Across the U.S., UK and Canada, more than half of parents surveyed who have a wealth transfer strategy are confident in their heirs, compared to a third who’ve done no preparation.

Being unprepared to give or receive wealth can put tremendous strain on family relationships. And differing expectations can lead to disagreements over the distribution of assets or how to manage the benefactor’s estate.

“Inheritance can be a major responsibility,” says Haskins. “That’s why it’s appealing for people to have peace of mind from knowing their beneficiaries are in a better position to be stewards of the family wealth.”

RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC.

Family Members With Disabilities Need Special Planning

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It’s not uncommon for families caring for loved ones with special needs to spend so much time ensuring the day-to-day needs of their child, spouse or sibling are met that they don’t consider how the academic, emotional, financial and physical support they provide will continue even after they, the primary caregivers, are gone.

However, the process of ensuring long-term needs of a loved one with a disability or medical condition are met can be complex, and delaying such planning can often result in more headaches and hurdles than are necessary. This applies not only to parents of a child with a disability, but to spouses whose partner suffers from something like dementia, too.

In fact, while a child is the traditional beneficiary in an estate plan, financial advisors are finding they are crafting estate plans for a growing number of families with someone who has age-related disabilities, such as Alzheimer’s disease or Multiple Sclerosis. Thirty million households provide care for a parent or other adult over age 50, and that number is expected to double in the next 25 years as more baby boomers age, according to AARP.

“Families are justifiably worried that if something happens to the primary caregiver of a child with special needs or an adult with a disability that care will continue, no matter how old that dependent is,” says Catherine Walker, a senior trust consultant for RBC Wealth Management-U.S. in Delaware. “Starting to plan early can give everyone greater peace of mind.”

Getting started

Families planning to leave an inheritance to someone with special needs should create a comprehensive plan that addresses not only the needs of their loved one, but of his or her future caregivers as well, says Tom Six, a wealth strategist for RBC Wealth Management-U.S. in San Francisco.

A plan should include: a will, financial power of attorney, a medical directive, and a trust. It should address the person’s long-term care and supervision, money management, guardianship or conservatorship, funeral arrangements and naming other people who want to help care for the person.

If the disabled child is young, parents might want to create a life care plan, or a road map with educational, living and career planning to help the individual transition to adulthood, Six says. Parents may also want to write a letter of intent that summarizes details, such as likes, dislikes, habits and aspirations of the dependent in order to help smooth their transition.

Such a plan is best crafted as an addendum to an estate plan, Six says, so that families and caregivers are working off of one document. Families should consult a special needs or disabilities lawyer to help plan and draft documents properly.

For families constructing a plan for children under 18, it’s usually wise to name someone you trust as a guardian or conservator. And it’s best to do it early, Six says, because it becomes more difficult once the child is legally considered an adult (between age 18 and 21 in all states).

Not everyone needs a guardian, however. The process of naming one can be costly and involves going to court, says Laurie Hanson, an elder and special needs lawyer with Long, Reher, Hanson & Price in Minneapolis. For disabled people who work and lead an independent life, a power of attorney and health directive may suffice.

“Our goal is to maximize the independence of the person with the disability,” says Hanson. “We have all of these tools to help people.”

Special trusts for special needs

Families that intend to leave an inheritance to loved ones with special needs should be aware that such gifts could jeopardize other important benefits that the individual receives.

Bequeathing money, retirement accounts or other assets directly could disqualify the beneficiary from receiving government benefits, such as Supplemental Security Income and Medicaid.

To prevent this from happening, parents often plan to leave funds to another child with the direction that they use the funds to care for their special needs sibling. However, the child with the funds cannot legally be compelled to use them for the other’s care.

Special needs trusts are one option open to parents, grandparents, friends or anyone else wishing to leave an inheritance or other assistance to care for someone. These trusts, by their very nature, may have restrictive distribution provisions and may require ‘Medicaid payback’ to the state when the individual passes away. However, special needs trusts funded with assets from a third party don’t require Medicaid reimbursement and allow the assets to pass to other beneficiaries upon the death of the special needs beneficiary, says Six.

For a smaller inheritance or for families who don’t have a reliable trustee candidate, a pooled special needs trust might work well, suggests Walker. Such trusts are managed by a nonprofit organization, but their fees, services and contracts vary.

Benefits of pooled trusts include working with managers who are knowledgeable and able to deal with the Social Security Administration and Medicaid. There are drawbacks, however. Such trusts can be expensive — there’s usually a one-time enrollment fee, plus an annual fee. As well, many don’t accept real estate or other nontraditional investments, and some distribute assets only at certain times of the year.

Beyond trusts and estate plans

While estate plans are critical to ensuring a loved one with special needs or a medical condition is cared and provided for in the event of their caregiver’s death, there are other financial tools families can tap into as well.

The new 529 ABLE (Achieving a Better Life Experience) Savings Plan lets families of disabled children save for certain disability expenses, including education, job training, healthcare and financial management, to supplement private insurance and public benefits.

Like 529 college savings accounts, state-administered ABLE accounts vary, but people can use any state’s plan. Since the 2014 law, most states have passed ABLE legislation and at least 18 have active programs.

“It’s really a great tool in some circumstances, but it only works if the person was disabled before age 26,” says lawyer Hanson. ABLE accounts also carry some restrictions, such as a one-account limit, contribution and account balance caps, and a Medicaid payback clause.

Despite the added estate planning complexities faced by families caring for dependents with special needs or medical conditions, those that begin the process early are likely to discover that there are multiple options and resources available to ensure the needs of their loved ones are met, no matter what happens down the road.

 

Trust services are provided by third parties. Neither RBC Wealth Management nor its Financial Advisors are able to serve as trustee. RBC Wealth Management does not provide tax or legal advice.

RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC.

Giving While Living

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When thinking about the legacy they want to leave behind, most people plan to bequeath all their assets to loved ones—but not until they themselves are gone. There is, however, another option, which is to start gradually giving away your assets during your lifetime.

It’s known as ‘giving while living,’ and although it’s less commonly used, it’s a strategy that offers many advantages. Perhaps the most practical is that it gives benefactors the ability exert control over how their assets are used.

There are intangible benefits, too. Benefactors who choose to give while living discover that it gives them an opportunity to share their long-term vision with heirs, and to witness how their heirs handle the assets. Beneficiaries, meanwhile, can learn to manage the wealth and become comfortable with an inheritance while consulting with their benefactors, putting everyone in a better position to preserve family wealth for the future.

Charitable giving during one’s lifetime also decreases the size of the estate to be passed on, which faces a 40 percent federal estate tax if valued above a certain amount—the limit for 2017 is set at $5.49 million.

“I honestly believe you get more personal benefit from giving during your lifetime, if you can do it,” says Catherine Walker, senior trust consultant at RBC Wealth Management-U.S. in Wilmington, Del. “When you approach transferring your wealth in this way, you can see the benefit and the happiness it brings.”

Barriers to ‘giving while living’

With an estimated $3.2 trillion expected to be passed down to inheritors in the U.S. over the next generation, the question of how and when to transfer assets is one that many families will have to grapple with.

According to our 2017 Wealth Transfer Report, produced in partnership with research firm Scorpio, more than half (61 percent) of Americans surveyed say they intend to transfer all their assets upon death.

Only a quarter (25 percent) said they plan to gradually transfer their wealth during their lifetime, compared with 30 percent in Canada and 35 percent in the UK.

There are a number of barriers, one of which is simply failing to take action. “People think about it, but pulling that trigger is really tough,” says Walker. “If they do, it’s often for a specific reason, such as establishing a 529 plan for a grandchild’s education, or making a $30,000 gift for a house downpayment.”

As much as parents want to leave a legacy, they’re also concerned about their own quality of life. The report found that 30 percent of Americans who plan to pass along their wealth only upon death intend to do so because they want to maintain their lifestyle. And nearly one-quarter feel that their funds are not sufficient to justify shrinking their nest egg now.

“For many retirees, it’s a cash flow concern,” says Bill Ringham, vice president and senior wealth strategist at RBC Wealth Management-U.S. “Before we encourage anyone to do lifetime gifting, we want to make sure their retirement goals and objectives can be met.”

How to start gifting during your lifetime         

A good starting point for any ‘giving while living’ strategy, says Ringham, is to gift a small portion of your wealth to a loved one or charity now. Individuals in the U.S. can give up to $14,000 annually—$28,000 for married couples—to an unlimited number of beneficiaries without incurring taxes. Those who choose to give above the annual exclusion amount may use some of their lifetime federal gift tax exclusion amount. However, if gifts exceed the lifetime exclusion, then the federal gift tax would be imposed at a current rate of 40 percent.

Some lifetime gifts—charitable giving, and direct educational and medical expenses—are exempt from annual gift and estate taxes, and there is no limit to how many such gifts you can make. Payment of a grandchild’s tuition directly to a college or writing a check to a hospital for surgery are just a few examples.

For those who want to make a large charitable gift or ensure long-term family involvement, establishing a private foundation may be an appropriate way to ‘give while living.’ Alternately, a donor advised fund is a simple way to donate smaller amounts through a parent nonprofit organization, which handles administration and investment management.

Using trusts and other strategies

Charitable giving, however, isn’t the only way to pass on one’s assets while living.

Parents of young children have the option of transferring money to a custodial account, which is owned by the child but essentially governed by the parents until the child comes of age, says Ringham. That age differs by state, but typically ranges between 18 and 21.

“With this approach, you’re giving when your beneficiaries are more likely to need the help,” says Malia Haskins, an RBC Wealth Management-U.S. wealth strategies consultant. “Your young children or their kids might need help with funding education or buying a home.”

A common strategy for parents is the creation of a revocable trust to hold their assets while they’re alive. A revocable trust, also known as a living trust, enables benefactors to retain full control; it can include instructions to beneficiaries, and it can name a trustee in case the benefactor becomes incapacitated. Since the trust is revocable, benefactors can update it any time. Once they pass on, the trust becomes irrevocable, at which point it cannot be changed.

Parents can also place their holdings into trusts to gain more control over how their assets are used during their lifetime. Trusts offer many options that enable benefactors to establish the timing and methods of distribution.

An irrevocable trust can also be created during one’s lifetime to transfer wealth out of an estate and to minimize estate taxes. In this strategy, a benefactor would make gifts to the trust instead of outright to beneficiaries. This strategy preserves wealth by enabling benefactors to freeze the value of appreciating assets in their estate and shift appreciation on those assets to inheritors to minimize estate taxes at their death. Distributions from the trust to beneficiaries can be made incrementally or as a lump sum depending on the wishes of the grantor.

A family limited liability company (FLLC) is another way to give to your children while you are still living. Parents can maintain governance by retaining the controlling interests in the FLLC while gifting interests that represent equity to their children.

By making lifetime gifts, parents—and benefactors in general—get a sense of how their beneficiaries will steward their wealth. Based on what they learn, they can then make adjustments to their wealth transfer plans, Ringham says.

Giving the gift of time

Despite the considerable value of family wealth expected to transfer over the next few decades, our Wealth Transfer Report reveals that many heirs receive little information and support before, during and after the inheritance process. In fact, only 37 percent of American inheritors had conversations with their benefactors about their inheritance before receiving the assets.

A ‘giving while living’ strategy is really a gift of time—it offers you, the benefactor, time to explain your intentions, to educate your children on managing the assets, and to answer any questions that may arise in the process. By giving while living, you’ll likely have years to resolve questions and further educate your beneficiaries on how to steward your wealth for the future.

Our report found that it makes a big difference to heirs if they have a better understanding of what they’re inheriting, how the family prefers to manage its finances, and how their benefactor intended for that inheritance to be used. One in five people who have inherited before say having someone to answer questions was invaluable, as was help with paperwork and decision-making about the inherited assets.

“It’s important to get comfortable with the idea of inheriting,” says Haskins. “Prepared beneficiaries are in a much better position to be good stewards of the money they inherit.”

 

RBC Wealth Management does not provide tax or legal advice. All decisions regarding the tax or legal implications of your investments should be made in connection with your independent tax or legal advisor.

RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC.