Having worked hard to build your net worth to provide for a comfortable retirement and legacy for your family, wealth preservation becomes a major consideration. Although there is a vast array of techniques, from relatively simple to elaborately complex, this article will discuss a few of the basic protections that apply to most estates – portfolio diversification, trusts, and insurance.

However, to use these techniques (and others), you should start by doing an overall review of your estate and developing a clearly defined estate plan for your particular needs. Each estate is unique; your plan should not be a “cookie-cutter” plan. Your estate planning team – CPA, attorney and financial advisor – can help you create a will, a trust, and other estate planning documents to coordinate the various tools available to attain your goals and protect your wealth.

Portfolio Diversification

You’ve probably heard the phrase “Don’t put all your eggs in one basket”. This can be extremely important to protect your net worth if possible.

Through portfolio diversification, you reduce risks due to market volatility. With the counsel of your financial advisor, you can spread your market risk among various types of investments – stocks, bonds, real estate, and other investments. With respect to stocks and bonds, you can further protect your net worth by investing in multiple sectors – different industries (technology, financial, industrials, etc.) and types of fixed income securities (corporate, U.S. government and municipal bonds, etc.).

If the bulk of your estate consists of a single asset, this may make it difficult. For example, if your estate value is tied up in a family business or real estate investments (possibly through a family limited partnership), it may not be possible to significantly diversify your investments. In this case, working with your CPA, attorney and financial advisor, you can develop a succession plan to meet your needs. Such a plan might include a buy/sell agreement, a stock option plan for key employees and establishing an Employee Stock Purchase Plan (ESOP – a type of qualified retirement plan that invests in employer stock), details of which are beyond the scope of this article.

Trusts

Trusts come in many flavors from plain vanilla to complex combinations. First, all trusts created by an individual (the “grantor” or “settlor”) are either intervivos/living (the grantor is alive) or testamentary (created in a will) trusts. Living trusts can be either revocable or irrevocable but testamentary trusts are not.

Revocable Living Trust (RLT)

For income and estate tax purposes, RLTs (and other trusts for the benefit of the grantor – “grantor trusts”) are disregarded entities. All tax related items are reported by the grantor on Form 1040, and if the grantor is the sole trustee, it need not even file a trust income tax return. However, RLTs do provide significant non-tax benefits. They include, among others:

Privacy

When an estate is probated, it must file an inventory that includes all personally owned (probate) assets. The inventory becomes public document. There is no need for your friends, neighbors, and the rest of the world to know your finances. The trust is a separate legal entity that is not part of your probate estate and, therefore not included in the probate inventory.

Goal security

A trust agreement should set forth the grantor’s intentions and govern the use and ultimate disposition of the trust assets. The terms of the agreement will control the assets in the trust regardless of other circumstances. It is more difficult to contest a will since it is generally outside the jurisdiction of the probate court.

Professional management

A trust can have a professional trustee or co-trustee to manage its investments. As a trustee, the financial manager (often the trust department of a bank or other financial institution) can be given more flexibility and responsibility than an investment advisor who acts as custodian for an individually held brokerage account.

Asset Protection

Although they are disregarded for income and estate tax purposes, RLTs are separate legal entities. Assets in a trust are owned by the trust not by the grantor or beneficiaries. Generally, assets held in trust are not subject to claims of the grantor’s creditors or creditors of beneficiaries.

Irrevocable Trusts

In addition to the benefits of RLTs, irrevocable trusts offer numerous tax-related benefits. These can range from removing assets from a taxable estate to transferring income tax obligations to the trust and/or beneficiaries if the trust is not for the benefit of the grantor. More sophisticated trusts can be used to provide for charitable contribution deductions while also providing lifetime or temporary support to a noncharitable beneficiary.

Insurance

Insurance can be an important part of any estate plan, especially for those subject to the estate tax. If a life insurance policy is held so as to not be includable in a decedent’s taxable estate, it can be used to offset the diminishing effect of the tax.

For all estates, life insurance can, among other things, (1) provide liquidity for an illiquid estate, (2) avoid having beneficiaries assume debt secured by inherited assets, (3) provide funding for buy/sell agreement so as to prevent the need to sell or liquidate a family business and (4) allow for the balancing of distributions to heirs when the estate includes a significant asset that is intended for particular beneficiaries to the exclusion of others. An example of the last item frequently occurs where there is a large family with a family business that is willed to only those members working in the business, but the value of the estate is to be shared equally by all.

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Protecting your wealth can be complex, but working with a trusted advisor can help simplify the process. Call us at 203-489-0612 to develop a personalized strategy tailored to your unique financial goals and circumstances.

Written by: Lawrence J. Bilansky, JD, CPA