Wealth Transfer Fundamentals
In this second part in a four-part series based on Northern Trust’s book, “Legacy: Conversations About Wealth Transfer,” we discuss the basics behind planning a successful wealth transfer.
||LEARN MORE: Listen to Ray Odom, Northern Trust’s director of wealth transfer services, Personal Financial Services, as he discusses Creating Your Wealth Transfer Plan - what to consider when transferring wealth to family members or charity, whether during life or at death.
||LEARN MORE: Listen to David Connell, Northern Trust’s chief fiduciary officer, southwest region, as he discusses Wealth Transfer Fundamentals - developing a basic understanding of key planning documents and the use of available tax exemptions, exclusions and deductions to decrease your tax liability, and the role that trusts can play in helping you achieve a variety of wealth management and transfer objectives.
By now, most people understand the importance of wealth transfer planning.
But successful plans first require a basic understanding of the key planning
documents, knowledge about how to decrease your tax liability, and recognition
of the role that trusts can play in helping you achieve your individual wealth
management and transfer objectives.
The best way to begin wealth transfer planning is to make sure you have the
three basic planning documents of wealth transfer: a will, a power of attorney and
a revocable trust. Of those documents, a current will may be the most critical.
“While most people would benefit from having all three, the truth is that many
individuals do not have a will, or do not have a will that is up-to-date,” says David
Connell, chief fiduciary officer for Northern Trust’s Southwest region.
Most people know that a will transfers your individually owned assets when you
die. It also names an executor to administer your estate and can establish a guardian
for your minor children. But what you might not know is that a will alone doesn’t
dispose of all of your assets.
Some forms of ownership contain their own transfer provisions, and some types
of assets, such as retirement plans, can only be transferred by means of beneficiary
designations. In addition to retirement assets, property that will not pass under a
will includes property held in trust, life insurance, pay-on-death bank accounts as
well as property titled in joint tenancy with right of survivorship.
Astute wealth transfer plans don’t limit themselves to
simply transferring wealth. Your plan should also
protect you and your family during your lifetime by
including a power of attorney for property and a
health care power of attorney. The former gives the
person you name the power to deal with property
held in your name if you become incapacitated. The
latter will provide direction to medical staff, can convey
your wishes about life-sustaining treatment, and
may designate a friend or family member to speak
for you if you can’t.
According to estate planning attorney Jeffrey
Skatoff, partner and co-founder of Clark Skatoff LLP
in Palm Beach Gardens, Fla., “incapacity” or disability
planning is also a very important — but often
overlooked — strategy that can minimize disruption
to your health care and financial affairs should you
suddenly become incapacitated. Unfortunately,
many people think that incapacity or disability planning
is useful only for the elderly or people with significant
financial responsibilities. “But the truth is, if
you have any amount of wealth and you care who
gets it, then you should have a comprehensive estate
plan, the first part of which should include planning
for incapacity,” Skatoff says.
Of course, state laws vary and may require different
documents to accomplish your goals. For example,
in some states, a health care power of attorney
requires a separate document — a health care directive
or living will — to direct your attending physicians
about life-support decisions.
A “power of attorney” is an instrument designed
to empower a person to act on someone else’s
behalf during his or her lifetime. It ceases to be
effective once the person granting the power dies,
which is when a will or trust agreement can take
effect. Make sure your survivors know about these
estate planning documents beforehand to ease the
transition for them after your death.
Transferring Through Trust
The third key planning document is a trust. These are
extremely flexible instruments that can, for example,
fund charitable endeavors and provide continuity of
management for your business during your lifetime
and across generations.
By combining these key documents with skillful
use of exemptions, exclusions and deductions, your
estate planning attorney can help you achieve your
wealth transfer goals in a tax-efficient manner.
“Setting up a trust is not as complex as you might
think, particularly when you work with an experienced
estate planning attorney,” Connell says. “Ask
your attorney to provide a plain language summary to
aid your review; check for basics such as distribution
provisions, trustee provisions and beneficiary names.”
By creating a trust, you place your assets, your
wishes and the welfare of your family in the hands of
your designated trustee. Whether a person, an institution
or both, a trustee typically invests and distributes
trust assets; administers discretionary provisions of the
trust; and performs recordkeeping, accounting and
Many trust creators name co-trustees. Often, a professional
trustee is appointed co-trustee together with
a family member or another individual. But, according
to Skatoff, leaving a professional trustee in charge can
be a good way to avoid any intra-family turmoil.
“If an heir is also named a trustee, it could be a
source of conflict between family members and
potentially encourage litigation,” Skatoff says. For that
reason, he often discourages clients from appointing
individual family members as trustees, he says.
Either way, make sure your trustees are people to
whom you can confidently entrust your property,
secure in the knowledge they will have good relationships
with your beneficiaries.
Keeping Up to Date
To successfully reach your wealth transfer planning
objectives, Connell recommends that you first update
your existing documents and beneficiary designations
on retirement plans and life insurance, then look at
lifetime gifting and the effect of taxes.
“Solicit competent, professional advice and
analyze the effect of transfer taxes before making
significant transfers to family members or friends,”
New Podcasts Provide Wealth Transfer Planning Advice
Despite the ongoing market turbulence, this is a good time to focus
on long-term financial planning, review your wealth transfer plans to
ensure that they reflect your wealth management goals and lay the
foundation for your future. For more information on wealth transfer
strategies, you can listen to our podcasts, “Creating Your Wealth
Transfer Plan” and “Wealth Transfer Fundamentals” online at