For most people, a simple will is the first step toward creating a comprehensive wealth transfer plan.
About 20 years ago, when you first drew up a will, you decided to leave the lake cabin to your daughter, and your sailboat to your son—both to be passed on to them upon your death. And you haven’t touched the will since.
But what if you’ve remarried, and now have two step-children? What if the sailboat is long gone, and now you feel passionate about leaving an endowment to the nonprofit where you volunteer?
In the coming years, an estimated $30 trillion is set to pass from Boomers to Generation X and millennials, according to a study by the consulting firm Accenture. The RBC Wealth Management Wealth Transfer Report, produced with research partner Scorpio, highlights the importance of preparing for the coming shift in generational wealth. It’s increasingly important for families to ensure that the plans they’ve laid out for the transfer of their estate keep pace with their ever-changing lives.
Of the 1,235 Americans surveyed, slightly more than half, or 54 percent, have a will in place, but only 30 percent have a full wealth transfer plan. There’s no question that a will is a good place to start. But in many cases, it may not be enough to adequately distribute family assets, preserve family wealth and create a long-term legacy that reflects the family’s values and wishes for future generations.
The research underscores the importance of having a comprehensive wealth transfer strategy. The way that wealth is passed on can greatly affect how long a family legacy will last and how meaningful it might be.
A will is often sufficient for an individual with a small estate and no extenuating circumstances, says Catherine Walker, a senior trust consultant for RBC Wealth Management–U.S.
A will is a matter of public record, meaning anyone can access it, and it can be contested in court.
But there are limitations to a will. For instance, “a will can’t preserve wealth for multiple generations, or determine how and when distributions occur,” says Walker.
Another limitation is that a will can be easily forgotten. Typically, the document is stored away and doesn’t get revisited or revised as life evolves, says Liz Jacovino, a wealth strategist for RBC Wealth Management–U.S.
That’s one of many reasons why RBC Wealth Management strategists advise people with large estates, large families, blended families or special situations to create a comprehensive wealth transfer plan. It should encompass all facets of an estate—everything from real estate and securities holdings to business and philanthropic interests.
A comprehensive wealth transfer plan should, at the very least, include four key documents: an up-to-date will, a revocable trust, a power of attorney and a health care directive. As the American population ages, issues around health and long-term care should be addressed in estate planning conversations.
“A lot can happen between now and death,” cautions Jacovino. “Planning is even more important if parents are concerned about heirs’ ability to effectively manage inheriting wealth, whether due to family responsibilities, or impediments such as health issues or addictions,” she says.
“If your heirs are young children and you don’t know what the future holds, you can create a trust to protect the assets until they reach a certain age,” says Jacovino. Trusts give parents an added level of control by allowing them to stipulate when and how the children receive their assets, and even what conditions might disqualify them from inheriting.
Parents who transfer assets to a revocable trust avoid probate and retain full control. They are able to make changes to the trust which, upon their death, converts to an irrevocable trust that cannot be altered. Assets put directly into an irrevocable trust are no longer part of the estate and aren’t subject to estate tax.
Walker helps clarify the distinction between a will and a full wealth transfer plan. “A will says who gets what, but a trust says who gets what, when, where and how,” says Walker. A will, which is a public document, can be embedded within a trust, which is private, rendering the contents of the will private as well.
People with comprehensive wealth transfer plans commonly use multiple methods and structures to pass on their wealth. Legacy planning and philanthropic techniques—such as estate freeze trusts, generation skipping trusts and charitable giving vehicles—can reduce the size of a benefactor’s taxable estate, minimize taxes, and protect assets left to the next generation.
Parents can also establish trusts for specific purposes, such as provisioning for the needs of a child who is differently abled, or keeping the proceeds from a life insurance policy out of an estate, in order to give beneficiaries the liquidity to help pay estate taxes.
If parents are interested in preserving their wealth for multiple generations, they can set up a dynasty trust. Assets in the trust will be distributed to children for life, with remaining assets going to grandchildren or later generations. The transfer of generation skipping property can be subject to an additional tax. Some states also limit the duration of the trust.
A limited liability company (LLC) is a good option for property and investments that are difficult to divide among multiple beneficiaries, says Jacovino. Assets can be put into an LLC, in which the benefactors and beneficiaries become shareholders.
Another option is a life estate, which is employed in second marriages where the husband wants his new wife to continue living in their home after his death, but the house will pass to his children when she dies, says Ringham. A qualified personal residence trust is similar, but the right of use is limited to a certain number of years.
If people are passionate about a cause, they can create a long-term philanthropic strategy using different types of trusts, a private foundation, or a simpler donor-advised fund. A foundation is a good choice for benefactors who want to donate a large gift, exert greater control or ensure long-term family involvement.
Given the pace of change in many people’s lives, wealth transfer plans can quickly become outdated. Parents should review and revise their wealth transfer strategy at least once a year as circumstances change. For instance, a business succession plan or long-term care arrangements for a child with special needs are two types of plans that people should revisit annually, says Bill Ringham, director of private wealth strategies at RBC Wealth Management–U.S.
Think of a plan as a guide for your heirs, says Ringham. For many people, receiving an inheritance is their introduction to wealth. For that reason, a good estate plan should anticipate the questions that a first-time inheritor might have about fulfilling their benefactor’s wishes and carrying out their responsibility. It’s likely that inheritors will want to know, “Do I need to pay taxes on these assets?” or “Does my benefactor have a financial advisor who can help determine how to manage the inherited assets?”
Indeed, the Wealth Transfer report found a strong correlation between a person’s degree of preparedness and the confidence they have in their heirs’ ability to maintain their legacy. Across the U.S., UK and Canada, more than half of parents surveyed who have a wealth transfer strategy are confident in their heirs, compared to a third who’ve done no preparation.
Being unprepared to give or receive wealth can put tremendous strain on family relationships. And differing expectations can lead to disagreements over the distribution of assets or how to manage the benefactor’s estate.
“Inheritance can be a major responsibility,” says Jacovino. “That’s why it’s appealing for people to have peace of mind from knowing their beneficiaries are in a better position to be stewards of the family wealth.”
RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC.
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