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Controlling Your Legacy: Understand Your Estate Planning Needs

RohrBy Peter Rohr

Affluent investors in Philadelphia remain concerned about the economy’s impact on their ability to meet financial goals, with 53% currently expressing such concerns (50% nationally), compared with 53% one quarter ago and 48% in January 2010 (45% nationally).[1] This persistent concern could prompt investors to take a renewed look at their investment strategies to help determine how to preserve hard-earned wealth with the goal of creating a family legacy that lasts for generations. In reviewing ways in which to meet this goal, it’s important for physicians to consider making their estate planning needs a priority.

Never too soon to start planning

An estate attorney can help you ensure that your legacy will be established and preserved for your heirs. Careful planning with your financial, legal and tax professionals may help you identify strategies with tax considerations, and can also help you identify and designate beneficiaries. Moreover, it may help alleviate costly administrative woes that could be passed on to those you care about. Your estate plan should include a will, assignment of power of attorney, a living will or health-care proxy, and in many cases, a trust. Once you have your estate plan in place, it is a good idea to periodically review your will and estate plans to ensure that they stay current in light of frequently changing laws and economic conditions, and ensure that you account for all your assets.

The changing tax landscape

Sweeping regulatory changes and uncertainties in the estate tax landscape may have complicated estate planning. Under the original Economic Growth and Tax Relief Reconciliation Act of 2001, estate taxes and generation-skipping transfer taxes, taxes that are assessed on property that is passed from one generation to a generation that is two or more levels below the person who is making the transfer, were to be eliminated by year-end 2010.[2] While this statute has likely benefited many individuals planning their estates for the last ten years, unless Congress acts to make the repeal permanent or revises it in some way, taxes are bound to return with only a $1 million exemption and a top tax rate of 55%, compared to the current 45% top estate tax rate.2

The confusion surrounding the impending termination of the inheritance tax has caused many individuals to temporarily delay estate planning. But instead of standing by, discerning physicians could consider the many options that will affect how their legacy moves forward. Especially in light of this year’s potentially confusing and frequently changing laws, it is wise to have an updated will and a strategic plan that anticipates multiple scenarios.

Take inventory of your assets

The first step you may take to begin the estate planning process is to assess income sources and take inventory of assets. This inventory should include investments, retirement accounts, insurance, and any other financial assets. With a clear picture of your total net worth, you and your financial advisor can begin designing a long-term strategy designed to help you manage your wealth and build your legacy.

Leaving assets to your spouse

While leaving an unlimited, generous sum to your spouse tax-free may seem like the most logical tactic, consider mechanisms that may allow you to increase tax exemptions and further enhance the potential wealth transferred to future generations. By leaving all of your assets to your spouse, you actually increase your spouse’s taxable estate and forego some key estate tax exemptions.2 In order to help maximize the impact of your assets, it’s important to work with a legal and tax professional to understand and consider the most strategic, economical options available.

Incorporate philanthropy

Philanthropic giving is one way to support a cause while also helping to secure your family’s legacy and preserve your wealth. While philanthropic giving is an altruistic and selfless act, it also offers opportunities for social networking and potential tax benefits. According to the 2010 Merrill Lynch Capgemini World Wealth Report[3], assistance in understanding the financial and tax implications of philanthropic endeavors was one of the most requested areas from financial advisors in 2009.

Several options are available for those incorporating philanthropy into their estate plan. A charitable gift fund can allow you to make a tax-deductible donation, grow your investment tax free, and then direct a contribution to support nonprofits of your choice. Another option is to donate to community foundations which invest that money, pool the gains, and allocate grants ? usually to local nonprofits. This method grants you time to consider what cause you would like to support while simultaneously providing immediate tax deductions.

In addition, there are two popular types of charity trusts investors can also consider. Transferring assets in a charitable remainder trust (CRT) allows the trustee of the CRT to sell them without incurring immediate capital gains tax liability, and enables the trustee to reallocate the proceeds of that sale in a more diversified portfolio. Your heirs receive the income and your chosen charity gets the principal. The other option that allows you to avoid sizable gift taxes is to place your assets in a charitable lead trust (CLT). The charity receives a payment for a set number of years and any funds remaining go to you or your heirs. Any benefit is deferred until the end of the CLT’s term, meaning the gift tax value of the gift is discounted from its fair market value. In this case, the charity receives the income and your heirs receive the principal.

Choosing the right trust

There are many different kinds of trusts to consider depending on your goals and overall objectives. Trusts, such as the aforementioned CRT and CLT, can be useful estate-planning tools that can help you determine how assets will be distributed in the future while fulfilling your philanthropic wishes. Credit shelter trusts reduce estate taxes while providing support to your spouse. A grantor-retained annuity trust (GRAT) is particularly useful if you think your assets stand to outperform an IRS-stipulated interest rate.

Setting up the appropriate trusts can reduce your estate and gift taxes, avoid delay and publicity of probate court related to wills, and provide greater protection against creditors and lawsuits. Finding the most advantageous trust strategy for your unique needs and circumstances can be accomplished with thorough planning and assistance from your financial advisor and your legal and tax professionals.

2010, an Important Year to Focus on Your Estate Planning Needs

The federal tax rate is at an all-time low and there is no federal generation-skipping transfer tax for the time being2.The ambiguity of tax laws justifies the careful planning and time dedicated towards estate planning now. Although the value of the assets you plan on giving may have been impacted by the market downturn, in the long run it may work to your benefit to capitalize on current low interest rates before prices recover.

With uncertainty around potential changes in tax laws and emerging opportunities growing out of the current economic environment, this is an opportune time to speak with a team of professionals – your financial advisor, attorney and tax professional – about your estate planning needs to help ensure that your family and favorite causes reap the maximum benefits of the assets you intend to pass on to them.

Peter A. Rohr, Senior Vice President–Investments, is a Private Wealth Advisor with the Private Banking and Investment Group at Merrill Lynch in Philadelphia. He can be reached at (215) 587-4731 or peter_rohr@ml.com.  Opinions are subject to change due to market fluctuations. Investing involves risk. Investing in securities can result in a loss. Any information presented about tax considerations affecting client financial transactions or arrangements is not intended as tax advice and should not be relied upon for the purpose of avoiding any tax penalties.

[1]Braun Research conducted the survey by phone between Dec. 1 and Dec. 16, 2009, for the first report, March 3 and March 15, 2010, for the second report and June 11 and June 29, 2010, for the third report on behalf of Merrill Lynch Wealth Management. The nationally representative sample consisted of 1,000 affluent Americans with investable assets in excess of $250,000. Three hundred affluent Americans were oversampled in each of 14 target markets.

[2] Merrill Lynch Wealth Management, “Is the Holiday Over for Estate Planning” April 2010.

[3] The 2010 Merrill Lynch Capgemini World Wealth Report is an annual study that examines the macroeconomic and other factors that drive wealth creation and the key trends that affect high net worth individuals around the globe.

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