Although affluent individuals and families obviously get a lot of things right when it comes to accumulating and managing wealth, they’re not immune to making mistakes. This is especially true when it comes to tax and estate planning, given the increased complexity that comes with significant wealth.
If you’re like most parents, you want to leave as large a legacy as possible for your heirs. But there is no shortage of tax, probate and inheritance traps that could pose a challenge. The following are four key mistakes you’ll want to avoid in order to keep as much wealth as possible in your family:
Gifting highly appreciated assets
While it’s understandable to want to see your children and heirs enjoying the fruits of the wealth you’ve amassed, don’t make the mistake of re-titling highly appreciated assets in their name as a way to transfer wealth. Why? Because when you gift a highly appreciated asset like real estate or stocks, the recipient receives the gift at its original cost basis (i.e., the original purchase price, adjusted for stock splits, dividends and return of capital distributions). If the asset was inherited, however, the beneficiary is afforded a “step-up” in the cost basis to the value of the asset at the time of the original owner’s death.
Therefore, the gift of a property that was purchased for $100,000 and now worth $500,000 would subject the recipient to capital gains taxes on $400,000 if they sold it right away. But if the exact same property was inherited and immediately sold, the beneficiary would pay no capital gains. The difference can be tremendous.
Hiding illiquid valuables
For many successful families, a great deal of their wealth may be tied up in expensive personal valuables (e.g., artwork, antiques and jewelry). Often, parents will purposefully avoid including these items in their Will based on an unwritten understanding that those items will find their way into the homes of their children outside of the probate process and without reporting the transfer for tax purposes. If one or more of your children are named as executors or co-executors of your estate, however, by circumnavigating proper reporting you are essentially asking them to run afoul of probate and tax laws.
Treating personal and legacy assets similarly
There’s a tremendous difference between having $2 million with the hope of leaving a meaningful inheritance, and having $10+ million with the certainty of transferring a sizable legacy. In the first instance, gradually reducing overall portfolio risk as you approach and then enter retirement makes perfect sense. But for larger estates, you are essentially managing two separate asset pools: one for your personal use throughout retirement and a second that will be transitioned to your beneficiaries. Since that second pool of assets won’t be needed for income, you can afford to maintain a higher return/higher risk profile with those investments, even as you reduce the risk associated with your personal-use assets.
Not coordinating the efforts of your advisors
No matter how experienced, savvy and reliable your trusted advisors are, none of them will be as successful in isolation as all of them will be when working in an integrated, cohesive manner with open lines of communication. Your tax accountant and financial advisor should be talking about which investments to sell for tax loss harvesting purposes. Your attorney and financial advisor should be working together to ensure your estate plan addresses your needs and is efficiently implemented. Collaboration is the key to avoiding critical wealth, estate and tax planning mistakes down the road.
In order to avoid these and other errors that can cost you both time and money, take time to talk with your SunTrust advisor about both your short-term and long-term goals, including your estate planning and legacy objectives.