Making the Most of your Financial Legacy: Six Key Steps

Article Contents
Step 1)
Calculate your estate’s value »

Step 2)
Balance two important goals »

Step 3)
Lower your estate tax liability »

Step 4)
Choose a variety of ways to transfer wealth »

Step 5)
Provide funds for expenses »

Step 6)
Prepare loved ones »

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If you plan and invest wisely, chances are that some of your savings will outlive you. Have you considered what may happen to that money? Do you hope to leave it to children and grandchildren – or perhaps to the charities you support? Providing for the next generation can be one of the many rewards of financial success. But creating an estate plan that supports your goals and values can be complicated. Don’t let the challenge overwhelm you. By thinking about estate planning as a step-by-step process, you may be able to accomplish at least a few of those steps today – even if retirement and the final transfer of your wealth are many years away.

Step 1) Calculate your estate’s value.
Knowing whether your estate is (or may become) large enough to trigger estate taxes may influence your planning strategies.

Step 2) Balance two important goals.
Plan for a comfortable retirement and a meaningful legacy.

Step 3) Lower your estate-tax liability...
...While achieving specific estate-planning goals.

Irrevocable trust: A trust that cannot be changed or undone that is used to remove the grantor’s assets from his or her taxable estate. The grantor gives up control of any assets transferred to the trust.

Step  4) Choose a variety of ways to transfer wealth.

Step 5) Provide funds for expenses.
Even if you plan carefully, taxes and final expenses (such as funeral and burial costs) may require your beneficiaries to borrow or sell off part of their inheritance.

Irrevocable life insurance trust (also Crummey trust): A trust that owns a life insurance policy on the grantor’s life and removes the value of the death benefit from the grantor’s estate. When the grantor dies, the insurance proceeds are paid to the trust or the chosen beneficiaries to provide a source of funds to pay estate taxes and final expenses. If the grantor is married and the life insurance is a “second-to-die” policy, after the surviving spouse’s death, the money in the trust passes free of federal estate taxes to children, grandchildren or other chosen beneficiaries.

Step 6) Prepare loved ones.
Help them understand your goals, expectations and wishes.

You’ve worked too hard to leave the distribution of your estate to chance. An estate-planning attorney and a professional financial advisor can help you review your situation and make appropriate decisions.

Contact your Merrill Lynch Financial Advisor or call 1-888-363-2389 for more information about estate planning services.

Wide Callout ImageCase Study
Donna and Mark were about to retire and wanted to make sure they’d be able to leave an inheritance to their children and grandchildren. Their combined estate of $2.5 million would not be subject to federal estate taxes under current law. But they realized that their estate could grow over the years – and that the estate-tax exemption amount might drop to as little as $1 million per person. To protect their loved ones from estate taxes, Donna and Mark planned as though their estates would be taxable. They began by “retitling” assets so each owned half, or $1.25 million. Next, their attorney established credit shelter trusts through their wills. If Mark dies first, an amount equal to the estate tax exemption amount then in effect will be placed in this trust. Income from investments in the trust will be available to Donna. But when she dies, the remaining balance will go to their children free of federal estate or gift taxes. The same strategy will play out if Donna dies first. Later in their retirement years, if Donna and Mark are sure their estates will be taxable, they plan to make five years’ worth of gifts to their grandchildren’s Section 529 college savings plan accounts. That will let them reduce estate taxes while ensuring that their money will be used as they wish, to make a meaningful difference in their grandchildren’s lives.

This case study summarizes a specific transaction and may not be appropriate for all investors.

1 Liabilities also include future estate-settlement costs your heirs would owe, such as funeral expenses and attorney and executor fees.

2 The current estate-tax exemption of $5.12 million will sunset on December 31, 2012. Unless the law is changed before then, the exemption in effect as of January 1, 2013 will drop from $5.12 million to $1 million and the top federal estate-tax rate will rise from 35% to 55%.

3 You must file IRS Form 706, “United States Estate (and Generation-Skipping Transfer) Tax Return.”

4 Any additional gifts made to the same beneficiaries during the five-year period would be subject to gift tax. The annual gift-tax exemption is prorated over the five-year period. If you die during that period, a prorated portion of your gift may be subject to estate taxes.

5 There are other gifting strategies available. For example, paying for a loved one’s education or medical expenses directly does not trigger gift taxes.

 


Any information presented about tax considerations affecting client financial transactions or arrangements is not intended as tax advice and should not be relied upon for the purpose of avoiding any tax penalties. Neither Merrill Lynch nor its Financial Advisors provide tax, accounting or legal advice. Clients should review any planned financial transactions or arrangements that may have tax, accounting or legal implications with their personal professional advisors.

Before you invest in a Section 529 plan, request the plan's official statement from a Merrill Lynch Financial Advisor and read it carefully. The official statement contains more complete information, including investment objectives, charges, expenses and risks of investing in the Section 529 plan, which you should consider carefully before investing. You should also consider whether your home state or your beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's Section 529 plan. Section 529 plans are not guaranteed by any state or federal agency.

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