Securing Your Family’s Financial Future

BERLIN – Today’s baby boomers constitute one of the wealthiest segments of the U.S. population, with an estimated $41 trillion expected to pass from boomers to their heirs by the year 2052. If you expect to be a participant in this massive transfer of wealth, you should approach it in a way that keeps family bonds strong, as well as make sure it is handled in a tax-efficient manner.

Although many estate plans are built around tax efficiency, there are other objectives that matter. That’s why, when you speak with your Financial Advisor about your estate, you might begin with a different question: What do you want your wealth transfer to achieve?

Before getting into the finances, estate planning needs to begin with a discussion of values,” says Chris Heilmann, Chairman and CEO of Merrill Lynch Trust Company. “Do you care about specific charitable causes? Do you want to encourage entrepreneurship in your grandchildren? How you answer questions like these will influence your strategy.”

The importance of this communication in planning can’t be overestimated. Because parents are sometimes unsure about the best way to share financial information with their children, a Financial Advisor can play an important role in getting the conversation started. Families often find that once the topic of family finances has been introduced in a clear and open manner, members are much more comfortable speaking with each other about it. If everyone in the family knows how those in charge of the estate are thinking, there is no “surprise factor.”

This comfort level is another reason it’s important for parents to introduce children to family advisors. When children aren’t familiar with a parent’s advisors, the result can be contending factions within the family concerning the execution of the parent’s wealth transfer plans.

Once the family has discussed your financial situation and your values, you should look into which wealth transfer vehicles best suit your goals. One solution may be the establishment of a personal trust. Today, there are nearly four million personal trusts, more than twice as many as existed in 1997, according to Tiburon Strategic Advisors, a market research firm.

About two-thirds of the personal trusts that exist today are revocable living trusts, which allow heirs to avoid the time, expense and public exposure of the probate process.

A trust can even be used to provide for a loved one with special needs without affecting that child’s ability to receive government benefits. For example, Sylvia and Mark Eastwold, a couple from Alabama, wanted to make sure that their 22-year-old son Brian — who can never be self-supporting because of a brain injury at birth — would have care even after they passed away. Their Financial Advisors suggested a trust that can supplement government benefits by providing for a home health aide and rehabilitation, as well as activities such as the Special Olympics.

Of course, trusts are just one estate-planning tool. Other techniques include annual gifting to loved ones, where individuals can give up to $12,000 per person each year ($24,000 for a husband and wife) completely free of gift and inheritance taxes — as of 2007; the direct transfer of appreciated stock to charitable organizations, which can help you avoid capital gains taxes that would come with selling them outright; and the establishment of 529 plans, which are a tax-advantaged way to help save for a child or grandchild’s future college costs.

Some lesser-known strategies involve IRA assets. When IRA money gets transferred, much of it can be lost to taxes. By working with a Financial Advisor, you can determine the best way to set up your IRA so that it can pass to your heirs without tax penalties.

No matter what strategies and techniques you choose, it is important to keep the lines of communication open with all family members who will be affected by the decisions you make. Helping younger generations understand what they can — or cannot — expect from you allows them to plan accordingly. By better understanding your choices, they may also learn to become more effective stewards of the family wealth.

(The writer is a Merrill Lynch senior financial advisor. She can be reached at 410-213-9084.)