Roundtable on Wealth Administration | Crain’s Chicago Enterprise

Given the market volatility and potential for a recession, should clients consider wealth transfer planning strategies, to individuals or charities, during lifetime vs. waiting until death? If so, what types of techniques could be used for the clients to maintain flexibility?

Pfaff: As a starting point, low asset values provide an excellent wealth transfer opportunity, because transferring assets while their value is lower (versus higher) makes more effective use of available gift and estate tax exemptions and exclusions. Some wealth transfer strategies also work more effectively during low interest-rate environments, while others are more effective during high interest rate environments. So if opportunities like low values or appropriate interest rates for the strategy you want to use presents themselves during your lifetime, and you know you have more than enough assets to support your lifestyle for the rest of your lifetime, then it makes sense to consider transferring assets now rather than waiting until your death. The concern with transferring assets during lifetime is that sometimes there are unforeseen changes in tax law, family circumstances or your balance sheet. So building maximum flexibility into irrevocable trusts is critical.

Paolini: There are always good reasons for lifetime gift planning. Sometimes there are beneficial tax incentives. Some people like to see their money being put into action. But it doesn’t have to be one or the other. Estate planners have financial planning tools that allow their clients to make hybrid gift trusts that allow for charitable contributions today that also leave residual trust funds for the benefit of the clients’ beneficiaries.

Bigelow: Assets or percentages/dollar amounts that can be earmarked “for the kids (or others)” today are best transferred when values are relatively low so as to minimize the use of gift/estate tax exemptions. That is, if values are expected to increase, it generally makes sense to move them now. If there is a desire for continued control or access or income, a direct gift may not be as advantageous as an installment sale or a gift to a trust such as a Spousal Limited Access Trust. When it comes to charitable gifts, it may not be as valuable to give depreciated assets because the capital gains tax savings and/or income tax deduction may not be quite as high.

How can clients protect their assets from threats such as creditors and bankruptcy and/or future estate taxes after their death?

Paolini: The most important facet in protecting one’s assets after death is to choose your trustee wisely. Many clients mistakenly feel that they can draft against all possible scenarios, but that’s simply not possible. Instead, it’s much more important to have the right person, or people, in charge to handle the unforeseen issues. Poor drafting can often be fixed, but a bad trustee could be catastrophic to any well thought-out estate plan.

Bigelow: Giving or leaving assets to irrevocable trusts for loved ones — instead of outright to them — can insulate those assets from outsiders. Trusts can be designed with a fair amount of flexibility. If the goal is to protect assets from the beneficiary him/herself, another trustee can be named. If giving the keys to the beneficiary is not the issue, but there is still a need to protect assets from outsiders, the beneficiary can be his/her own trustee and distributions of principal can be limited by a co-trustee or to those needed for health, education, and support.

Pfaff: As a general rule, it’s easier to protect assets from the claims of creditors if the assets exist in a trust that was created for you, as the beneficiary, by another person (the Grantor). Well-designed trusts often do not “force” distributions out of the trust to the beneficiary, because assets that remain in trust can maximize creditor protection and GST tax benefits to the extent possible. Properly designed trusts can be GST tax exempt, meaning that they will not be subject to the GST tax as they pass from one generation to the next, so long as the assets remain in trust.

How does a family best plan and evaluate long-term philanthropic decisions and other charitable activities?

Bigelow: Don’t make decisions on what to give based on tax consequences. It is always better for the family to keep the money and pay tax than it is to give the money away. If charity has a place in the estate plan, be thoughtful and specific. For example, don’t give money to your alma mater’s general operating fund so they can repave parking lots or pay law school professors’ salaries. Specify that you want the funds used to be used to endow a scholarship or for the football team. Along the way, involve family members who should have a say. Talking to children and grandchildren to find out what they would do with X amount of money can be a great way to help them develop their own sense of philanthropy and encourage future giving.

Pfaff: The amount of assets, family values and the interest of future generations in being involved in the process of managing the assets destined for charity must all be considered. Some families like to use charitable vehicles as a tool to teach children how to think about investing and spending decisions, and to generate an interest in working together as a family and an interest in charitable giving. The most commonly used tool is a donor advised fund (DAF), because it is the simplest and most cost effective. A DAF is set up by an account owner who names an advisor to recommend charitable distributions from the DAF to qualified charities. Not all DAFs are alike, so you have to make sure you understand what you want to accomplish and whether a given DAF is appropriate for you. Large gifts that include naming rights — the right to name a physical piece of property, such as a building after the donor or another person — must be carefully reviewed by an attorney who is familiar with the potential pitfalls.

Paolini: Consider the ultimate result that would make you happy five, 10 and 20 years after you’ve passed, then make your decisions and set up your activities accordingly.