Clients often ask advice regarding how best to leave assets in order to maximize tax advantage. They look to the estate planning attorney for advice on income taxes, estate taxes, and even property taxes. But, perhaps the best advice we can give is how not to leave assets: directly.
Clients typically see the advantages to leaving assets directly to their beneficiaries: simplicity. But, often they do not see the potential downside to doing so and the advantages to leaving the assets in trust for the beneficiaries’ use.
Each year, many beneficiaries who have been given their bequests directly end up penniless. Often this is through their mismanagement of the assets, as in the recently publicized case of Nick Martin. After the sale of the business his father started, Martin received $10 million after taxes. A decade later, mismanagement and missteps left him with little. Here is a link to a recent New York Times article on the topic: New York Times Article
Whether it is through mismanagement, divorce, or creditors, the work of a lifetime can be dissipated surprisingly quickly if it is not carefully protected. Estate planning attorneys know that a continuing trust is usually the best way to protect against these risks while also providing the potential for tax minimization.
If your client expresses a desire to leave the assets outright to their beneficiaries, do you attempt to educate your client regarding the benefits of a continuing trust? Do you discuss divorce protection for the beneficiary? Do you discuss asset protection for the beneficiary? Do you discuss GST planning to save estate taxes at the beneficiary’s death? Do you discuss third party management of the assets?
While the client has the ultimate decision on the matter, they can only make an informed decision after they know the pros and cons. Do you try to educate your client on the options available to them?
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
6050 Santo Rd., Ste. 240
San Diego, CA 92124