In every meeting, we speak with our clients about ways to maximize total family wealth. There are many facets to this process, including choosing the right companies and managers with whom to invest, entering and exiting investments at the right time, setting up an appropriate asset allocation and, of course, investing in a tax-efficient manner. As clients have undoubtedly heard us say, it takes a lifetime of 6% returns on investment to outpace income and estate tax rates approaching 50%. For this reason, a responsible wealth management discussion includes not only asset allocation but, perhaps more importantly, asset location. The more you can transfer to charity, children, grandchildren and others during life, especially into income tax-favored accounts, the less you will transfer to federal and state governments at your death.
Many of our clients raise objections to estate planning. Some are convinced that the current administration will do away with the estate tax, so complex planning is a waste of time and legal fees. Others feel their financial lives are overly complex and are hesitant to put additional structures in place. No matter your objection to estate planning, if you are interested in transferring wealth to the next generation in a tax-efficient way with no long-term commitment, trusts or legal fees, read on!
Objection 1: “I get it. I want to transfer assets to my children and grandchildren, but my financial life is already too complex. I understand the value of trusts, but it’s too much trouble to set them up and keep track of ongoing administration.”
We hear you! There are some very simple ways to transfer significant wealth to your family during life without complex planning structures, thereby increasing the overall wealth transferred to children and grandchildren and decreasing taxes paid.
As an example, meet Mr. and Mrs. Client, a married couple in their 60s. They have two children, Son and Daughter, both of whom are married. They have three young grandchildren, all of whom currently attend nursery school.
To the chagrin of their wealth planner, Mr. and Mrs. C do not have the time or patience for GRATs,1 SLATs2 or QPRTs.3 The documentation and annual interest payments required for an intrafamily loan4 make them cringe. Despite (or because of!) these feelings, they were savvy enough to call their relationship manager and set up some automatic payments to take advantage of the medical, educational and annual exclusions from gift tax. Here is a copy of their annual account statement for the first half of the year.