Handing down your wealth is not as simple as writing a check or naming a beneficiary. You want to make the best decisions to preserve your financial legacy.
Below Thomas Brockley, senior vice president and branch director at RBC Wealth Management, shares some tips on how to maximize your giving and ensure your wishes are followed.
When donating to charity, structure your gift carefully to help your recipient receive the most from your bequest, Brockley advised. If you're donating highly appreciated assets, such as stocks, you may wish to work with the charity and your financial advisor to set up a charitable remainder trust.
With a charitable remainder trust, the stock is removed from your taxable estate and held in a trust while you're alive, then transferred to the charity when you pass away, he said.
During your lifetime, you'll get an income stream and receive an income-tax deduction for the value of the gift in the year it was given.
While a charitable remainder trust is ideal for highly appreciated assets such as stocks and real estate, you also can fund the trust with cash.
If you're passing a family business to the next generation, you may want to consider a life insurance trust, Brockley said.
Whether your estate includes prime Manhattan real estate, a family dairy farm or a chain of retail stores, a number of taxes and fees will need to be paid—such as insurance premiums, mortgage payments, property taxes, utilities and accounting fees—while your estate is still being settled.
A life insurance trust will provide the funds for your heirs to pay those bills.
For real estate bequests, consider establishing an irrevocable personal residence trust. Assets placed in such a trust count against the federal $5.43 million gift tax exclusion. The value of the property increases outside your estate and estate taxes are based on the value of the property at the time it was placed in the trust.
Adding life insurance in the trust will ensure your heirs receive funds to pay the immediate bills and taxes on the property.
An old accounting maxim says, “Trust, but verify." In this case, the wording could be changed to, “Create a trust, but specify."
To set guidelines on how and when an inheritance will be spent, you can set up trusts for your children and grandchildren—as opposed to making direct monetary bequests.
Careful wording in the trust will help further ensure your heirs don't fritter away the estate you spent years building. Language in the trust can clearly spell out what the money can be spent on - such as higher education - and cannot be spent on - such as a new car - Brockley said.
“You probably don't want a grandchild at age 19 to get a million dollars to spend however they want to," he warned. Though, he's seen it happen.
One young client spent $50,000 of a quarter-million dollar inheritance in just a couple of weeks, he said. The client bought a car, wrecked it the next day and then bought another one.
Choosing the right trustee is also key.
A family member may be your best option for a smaller estate, but if the estate is larger than $500,000, you might be better off hiring a corporate trust manager, Brockley advised.
That corporate trust manager will ensure that requests for funds are only approved if they fit within the trust parameters.
“You could have nieces and nephews going to their uncle and saying 'I know I was only supposed to get X but I need more,'" Brockley said. “If the uncle says no, you have one less guest at the Christmas table. The corporate trustee can say, 'Here are the rules and that's it.'"
Finally, it may sound basic, but periodically check the beneficiaries on your accounts to make sure your estate goes to the right people, said Brockley. That's an easy step that people often ignore.
“A young person's first insurance policy might name their mother as beneficiary," he said. “Now they're married and have two kids. You have $100,000 of insurance going to the mother. The mother can't give all the proceeds to the daughter-in-law because of gifting limits."
With the right plan in place, your estate will be passed along according to your wishes, and your loved ones and favorite causes will all benefit.
This article is for general information and education only. It is provided as a courtesy to the clients and friends of City National Bank (City National). City National does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors or persons quoted as of the date of the article with no obligation to update or notify of inaccuracy or change.
City National, its managed affiliates and subsidiaries, as a matter of policy, do not give tax, accounting, regulatory or legal advice. Rules in the areas of law, tax, and accounting are subject to change and open to varying interpretations. You should consult with your other advisors on the tax, accounting and legal implications of actions you may take based on any strategies presented, taking into account your own particular circumstances.
This article is a republication of content originally published by RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC. © 2020, Royal Bank of Canada, used with permission. This article may not be reproduced, distributed or further published by any person without the written consent of RBC Wealth Management. Please cite source when quoting.