Planning to a T

Planning applies to everyone, regardless of what you do or how much wealth you might have amassed. When we think about a financial or estate plan, it is important to keep in mind four main components that all start with the letter T.

The 4 T’s are central to every plan, and each component can be impacted by the shift or change in another component. If you can keep each T in mind as your life, family, business and legacy evolve, you can ensure you are addressing every aspect of what makes up a comprehensive and sound blueprint for your family’s current and future financial picture.

What are these T’s?

1. Transfers: The who, what, how and when of your ownership transfers.
2. Threats: How you, your family and even your business are protected from external forces.
3. Taxation: Income tax and estate tax strategies to ensure you are making the most of potential savings embedded in the tax code.
4. Teaching: How you will communicate your legacy to your loved ones.

Let’s explore each of these T’s...

• Who will benefit from your legacy? The “who” can be a spouse, children, grandchildren, extended family or our four-legged family members. You may want to benefit charities or causes that are near and dear to your heart.
• What will you leave? You can leave specific assets or specific amounts of money that provide for travel, wedding expenses or starting a business. Keep in mind not only the fair market value of an asset, but also its cash flow, income tax impact and even its appreciation potential.
• How will you transfer these assets? For example, you may leave outright distributions or leave assets in trust. Family heirlooms or tangible assets, such as vacation homes, should be specifically designated in your estate documents. You may also want to keep in mind how to be fair or equal among certain beneficiaries. Finally, charitable gifts can be structured in a variety of ways, either in a lump sum or payout over time.
• When will you make these transfers? Will they transfer during life, after you pass or a combination of the two? Will they be made at specific ages, dates or milestones? Timing also plays a part in the taxation considerations (discussed later), as does whether you make a gift or even sell an asset at a discounted price and whether you do it all at once or over time.

Taking time to jot down your thoughts on the transfer category will be a big step in initiating conversations with your loved ones and your trusted advisors who can help you put pen to paper and make it official.

Understanding potential risks can help decide what protections might be warranted.

• Income replacement life insurance can ensure your family will be financially sound if you are the primary breadwinner in an unexpected event.
• Liquidity replacement life insurance can help minimize the impact of an estate tax bill to your family.
• Disability insurance is important if you are a business owner or someone whose family income is dependent on your health or ability to perform.
• Property and casualty insurance covers cars, boats, homes and losses exceeding property insurance coverage, called umbrella insurance.
• Long-term care coverage can protect against the cost of extended illness.

Another risk we don’t often consider are the predators that thrive in cyberspace. Cybersecurity is an important protection to consider in today’s environment, as identity thieves create new ways to invade our privacy every day. Finally, it is important to consider how we will protect our loved ones from external threats such as creditors or divorcing spouses. Sometimes the best way to do that is through a trust structured to benefit your loved ones but protect their inheritance from would-be creditors. Prenuptial agreements are also viable tools, as are business agreements like buy-sell agreements. To preserve disability benefits, sometimes a special needs trust also has a place in your plan.
Talking to your trusted advisors about how to put these protections in place will be a big step in ultimately ensuring iron-clad protection for you and your loved ones.

As you think about transfers to individuals or trusts, keep in mind that you have:

• An annual gift exclusion of $17,000 per donor in 2023 means you can gift $17,000 per year to an individual without any transfer tax consequences. You can make this gift to as many individuals as you’d like (i.e., if you gift to 10 people, that’s $170,000 transferred without tax in any one year). If you are married, that exemption is doubled, allowing you to gift $34,000 per year per individual as a couple.1
• A lifetime exemption (sometimes called a unified credit) of $12,920,000 per donor in 2023 (the person making the gift) that excludes tax on transfers to individuals over and above your annual exemption. Whatever amount you don’t use during life can be used to cover the tax on transfers made at death.1
• The ability to pay education or medical expenses directly to the institutions providing those services, without paying tax on those transfers. Furthermore, these payments do not use your annual exclusion or lifetime exemption.2
• Transfers can be given directly to individuals or in trust for their benefit. Income taxed in a trust has the potential to pay a higher tax rate than its beneficiaries, due to compressed tax brackets; however, the protection a trust can provide from creditors and predators could far outweigh the potential additional income tax. Transfers earlier in life can move appreciation outside of a taxable estate that would be taxed at 40% over $12,920,000. Annual gifting, tuition and medical payment for beneficiaries becomes a necessary annual discussion and will allow you to methodically reduce your family’s taxable estate while transferring wealth to the next generation.1

If you have philanthropic endeavors in mind, charitable gifting during life can reduce income taxes and can minimize estate taxes at death. The type of gift and the type of charity to which you gift can affect the deductibility of the gift. Consulting advisors on the type of assets to give away and the type of charity (public or private) will help you understand the amount of your income tax deduction. There are no limits on deductibility for charitable gifts at death. Some clients choose to gift to charity the amount of their estate in excess of their lifetime exemption to “zero out” any potential estate tax. Keep in mind that there are also trust vehicles, such as charitable remainder trusts and charitable lead trusts, that you can establish while you are alive or after your death that will provide a combined benefit to both family members and charities. Ensuring that goals and objectives are considered before venturing down a wealth transfer or asset protection path is an important step before understanding the income or estate tax impact of any decision. Reviewing the tax impact with your advisors will help to ensure smart financial planning and avoid letting the tax tail wag the dog. 
If you have philanthropic endeavors in mind, charitable gifting during life can reduce income taxes and can minimize estate taxes at death.

Your most valuable legacy for your heirs is the life, values and business knowledge that you can pass down to them. Teaching can start at an early age. For example:

• Sharing at the dinner table what you did at work that day.
• Talking about your day on the way home from school.
• Setting up piggy banks for spending, saving, and charity or church is the beginning of learning about money.
• Helping your child invest in a stock like Amazon or Apple that they are interested in and watching it move up and down with the market, as well as understanding dividend and tax implications, are important investing lessons.
• Having your teens research charities and compete for family giving dollars can also be a way to pass down family values.
• Talking to 18- and 19-year-olds about health care and financial powers of attorney is the first view into planning for the unexpected.
• Sharing your intent and desires for your family after you’re gone and why you have made decisions in your estate plan, helps avoid questions after you pass. It also helps your children begin to plan for their families.
• Teaching is not about dollars and cents but about values, priorities and life lessons that only you are able to pass to your children and grandchildren, as well as other loved ones who will carry on the family legacy long after you are gone.

Conclusion 

Understanding your goals around the four T’s is the first step to creating the comprehensive blueprint for your family. Your plan can control the future impact of creditors and other risks to your beneficiaries. As you implement your plan, realize that each decision has a potential impact on estate and income taxes.