Tame Estate-Planning Anxiety with a Wealth Transfer Framework

What I love most about my job are the conversations I have with clients. I enjoy sitting with interesting people and hearing about their ambitions, hopes and dreams.

Every client is unique, and each has accumulated their wealth differently. But all of them are passionate and creative. While their visions for themselves differ, I see that many clients take great pleasure in being able to pass on some of their wealth to benefit their families and communities for generations.

Although the goal is common, the actual process of intergenerational wealth transfer is not as simple as it might seem at first glance. It involves many considerations (including emotions!), and ambitions are best met when you plan with intention.

Who benefits from your wealth?

As you think about how you will transfer your wealth to others, recognize that only three groups can potentially be beneficiaries of your assets:

• Your family — This includes personal spending during your lifetime, as well as gifts to family and friends
• Charity — Amounts you give to charity during your lifetime and at death
• Government — Estate, income and gift taxes

While identifying your preferred beneficiaries may be fairly straight-forward, making choices that optimize your family’s resources can be very challenging as it’s tough to really know how much your family will need, when they will need it, and the impact decisions you make now might have on them in the future.

For most families, the natural priority is to allocate enough resources to take care of their loved ones first. Then they look toward charity, if they have philanthropic goals. Almost no one would choose to allocate assets to the government in the form of taxes.

Directionally speaking, taxes go down when you have more clarity and action around defining the first two priorities, and vice versa. This is because, when given enough time, most intergenerational wealth transfer taxes can be avoided through proper planning. But this is only the case if the family is clear and willing to act in the face of uncertainty. It’s also imperative to realize that there are very few “free lunches” when it comes to sound wealth transfer — meaning that most effective planning techniques involve a tradeoff, such as giving up control of an asset legally to avoid taxes.

So, it’s natural for clients to feel a bit of anxiety about making financial decisions that can impact generations of beneficiaries. And too often, this anxiety leads to inaction.

But it’s important to remember that not having a wealth transfer plan is a plan in and of itself. You’re just allowing the government to step in and implement a plan for you.

3 steps to setting a framework

To remove anxiety from the process, we walk clients through these three steps when helping them develop wealth transfer plans that best meet their goals:

1. Identify and articulate your personal core values
This is the most essential and creative part of the process. Well-articulated values can serve as helpful guidelines for a wealth transfer plan. My colleague, Gregory Fasig, wrote about how to use your core values to define your legacy.

2. Determine how much is available to give to the next generation
As part of a long-term plan, you first need to be sure you have enough assets to comfortably last throughout your life. If there are no projected excess resources available to give away while you’re alive, the wealth transfer considerations may be limited to transfers at death via an estate plan, in case your life doesn’t turn out to be as long as you expect it to be.

3. Consider spreading assets among family, friends and charity
As you reflect on your core values and the legacy you want to leave, outline your intended purpose for the transfers. For example, do you want to pay for all your current and future grandchildren to go to college? Do you want to ensure your best friend since high school never has to worry about a roof over her head? Your desires should help determine the appropriate dollar amounts and timing of the transfers. They can also help you assess what actions you might want to take now to prepare the beneficiaries for the gifts, as well as develop a communication plan for making sure your intentions are well understood by them.

Decide on the right strategies for you

After you’ve worked through this framework, taking the next steps to chisel out a sound transfer plan becomes much more straightforward. Your advisor will have the necessary information to present the best options to you and, once agreed upon, can take care of the burdensome paperwork.

For starters, everyone should have core estate planning documents such as a will and, in some states, a living trust. If you have substantial wealth (over $11.18 million per person), you should consider additional strategies to avoid paying gift and estate taxes. For charitable giving, perhaps a private family foundation is the best solution for you. Your advisor should be able to describe the various alternatives, including the pros and cons of each.

Again, this is just the simple framework for wealth transfer planning. As you consider who will receive your assets and how, it’s important to fully understand the implications of passing wealth to future generations. In an upcoming article, I’ll share some questions to help you explore the emotional side of money.

(Aspiriant CEO Rob Francais contributed to this article.)