Death and taxes may be inevitable. A big bill for your heirs is not.
“It’s a strategic game of chess played over decades,” says Mark Bosler, an estate planning attorney in Troy, Michigan, and legal adviser to Real Estate Bees. “While the average person relies on a simple will, the well-to-do utilize a different playbook.”
The solution at the center of many estate planners’ designs is a trust.
Among the reasons: Even if you aren’t leaving enough behind to trigger taxes, your estate can get tied up in probate court, which typically assesses fees based on an estate’s total value.
“You are leaving what might have gone to your children or other loved ones to attorneys and the courts,” says Renee Fry, CEO of Gentreo, an online estate planner based in Quincy, Massachusetts. “Anywhere from 3 to 8% of an estate might be lost.”
It’s possible with one caveat: You have to die.
It works like this: Say your savvy uncle bought 100 shares of Nvidia when it began trading in 1999 at $12 a share. Between splits and a soaring price, that $1,200 investment would be worth more than $9 million today. If he left it all to you, you could sell the shares owing little or no tax because gains are calculated from the day he died, not the day he bought it.
Benjamin Trujillo, a partner with the wealth advisory firm Moneta, based in St. Louis, Missouri, says it all seems “like a magic trick.” And it’s completely legal.
“Wealth transfer looks like smoke and mirrors,” Trujillo says. “Assets like stocks can quietly grow for decades and, when they’re inherited, the tax bill often disappears.”
Lawmakers have sometimes proposed limits on the “step-up” rule but at least for now, it remains, making it one of the biggest not-so-secret weapons in the arsenals of those looking to create generational wealth. If stocks aren’t your forte, “step-up” applies to other types of investments too, including artwork, real estate and collectibles.
Regulations vary from place to place, but many banks and brokerages allow you to name a beneficiary to whom the funds will be transferred to upon your death.
“One of the easiest ways to transfer assets hassle-free,” says Allison Harrison, an attorney in Columbus, Ohio, who focuses on estate planning.
Beneficiary designations generally override wills, so it’s important to make sure yours are up to date to avoid the mess of having, say, an ex-spouse end up with everything you saved.
All of this requires planning, but experts say investing a little time in mapping out your estate is one of the moves that separates the rich from the less well-off.
“Wealthy families plan,” says Fry. “They don’t leave assets and decisions unprotected.”
