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Ten Wealth Preservation Strategies

Estate and tax planning — it’s a subject many people like to avoid. That’s often because they think that estate planning is about two topics they’d rather not focus on: death and taxes. For some people, estate and tax planning is about something even more ominous: death, taxes and math. There is, however, another way to look at estate and tax planning. Beyond the details it’s about doing something that to most people feels worthy and important — preserving one’s wealth for the benefit of people and causes that matter to you.

Wealth preservation strategies fall into two general categories: (1) avoiding taxes lawfully; and (2) making wise decisions about people in your life.

Here are 10 ways in which estate and tax planning can help preserve your wealth:

1. Avoiding a 40 percent federal estate tax rate. Without planning, affluent individuals and couples risk 40 percent of their estate going to taxes rather than to their beneficiaries.

2. Protecting real property and other assets from the reach of creditors and law suits. This is possible by having LLCs and other business structures own the properties (rather than owning the properties in an individual capacity.)

3. Appointing a trust protector who can oversee the actions of the trustee. This can be especially effective when family members would not be appropriate to serve as a trustee. A trust protector can provide for a higher degree of comfort regarding asset management and the protection of interests.

4. Structuring real estate deals in order to avoid property tax reassessments. With good estate planning, it is often possible to tie property taxes to lower, historical valuations rather than higher, current valuations. In one example, a client who bought a house many years ago for several hundred thousand dollars. The client was able to pay property taxes on that valuation, even though the current fair market value of the house was close to $10 million.

5. Creating different classes of voting stock when some members of a family-owned business are more actively involved in the business. Estate planning helps the owners of family-owned businesses find the right balance between loyalty to family members and doing the right thing to grow the business.

Looking out for Children and Grandchildren

6. Avoiding gift taxes by taking advantage of the $14,000 annual exemption for gifts. For example, this often allows grandparents to give gifts to grandchildren without gift taxes coming due.

7. Creating trusts that are tailored to meet the needs of children and adults with special needs. Special needs trusts can be a powerful tool. They ensure that individuals with disabilities are taken care of and simultaneously allow for professional finance management.

8. Protecting foreign investors who invest in U.S. real property from paying taxes that exceed 40 percent. Too many non-resident aliens buy U.S. real property in their own name. Buying the property through corporations and other entities helps avoid potentially disastrous tax consequences.

Taking Advantage of Increased Exemption Levels

9. Creating trusts and other tools that allow individuals to take advantage of a step-up in basis. Capital gains and other taxes are often calculated based on the difference between a current valuation and the original purchase price. Without a step-up in basis, if someone purchased a commodity, e.g. gold, decades ago when the price was low, the heir would have to pay taxes on the entire gain of value. With a step-up in basis, the IRS uses the value of the gold on the date of inheritance to calculate the tax. This change can save many thousands of dollars in taxes.

10. Planning to take advantage of the differential between long-term capital gains taxes and corresponding federal income tax rates. With the increased exemption levels that are now available for federal estate and gift taxes, more people and couples need to plan to avoid federal personal income tax rates that often exceed 25 percent. One way to do this is to structure transactions and investments so that they qualify for the 15 percent long-term capital gains rate.

The list is, of course, far from comprehensive. These are just some of the tools and strategies that estate planning lawyers use to help their clients preserve their wealth.

By Kevin J. Moore