Leaving a Legacy

Advice for making sure your assets are handled the way you want

An outgoing president pays attention to his accomplishments at the end of the term, it is said, because he is concerned about his legacy.  He wants to be remembered as having made a difference. Though we may not think about it, each of us leaves a legacy. We pass on our values, the impact of our successes and struggles and often, our hopes for the future. For many, the legacy will also include passing material assets to a spouse, children and grandchildren or other significant persons.

Deciding how to transfer money can be complex. Advice from an experienced professional will help to avoid unintended consequences. Todd Mayo is president of Wealth Management of Cambridge Trust Company, located in Concord. “First,” he says, “think about your goals. How much do you want to leave? When and to whom? How much control do you wish to maintain during your lifetime?  What are the tax consequences of the various possible arrangements?”

Many people decide that a will is the best, and most simple, way to express one’s wishes for distribution of assets. But some want to avoid the probate process, which is costly and takes considerable time. Probate brings the will into the public eye. It offers no tax advantage. A trust remains private. It can remove money from one’s taxable estate. Once the trust is established, it is in effect immediately.

Mayo explains how a trust works. A trust places money (or other assets) given by a grantor (sometimes called ‘settlor’} in a secure entity (the trust), under the control of a person or entity (trustee) chosen by the grantor to carry out his or her wishes, as specified in the trust document. Variations on the basic trust concept can accommodate a wide variety of circumstances. Consider, for example, the dilemma of the third generation of a family that owns an island or substantial waterfront on a New England lake. The original family built cottages and docks, which the next generation inherited and jointly maintained. Now there is a generation of many siblings and cousins. If the property is placed in an irrevocable trust it is protected from being divided by squabbling relatives and parts sold for development.

A trust can be established to hold and distribute the proceeds of a life insurance policy or of income producing property. Another model, the wealth preservation trust, is designed for professionals (physicians, for example). The trust protects the grantor’s estate from unanticipated claims made years after the death of the grantor.

The Revocable Living Trust may be the choice of one who wants to continue to have control of the assets in trust. The grantor places a portion of his assets in the trust, and names himself as trustee. He (or she) sets the terms for use of the assets in the trust document. He might specify that during his lifetime, the assets will be used only for long term care expenses of the trustee and his spouse, or for college expenses of a grandchild. A successor trustee is also named, in the event that death or disability makes the grantor trustee unable to carry out the tasks. Upon death of the grantor, the assets are distributed as stated and the trust is concluded. If so specified, assets may also be distributed to another trust.

The qualified personal residual trust allows the transfer of ownership of an asset to a trustee, though the grantor continues to use the asset. A person who owns property near a college, for example, may transfer the ownership of the property to the college through a trust. When the grantor dies, the residual assets accrue to the trust.

Mark LaValle, senior vice president of Laconia Savings Bank, says that the choice of a trustee is critical. This person monitors the administration of the trust and has considerable discretion. Some grantors select a trusted family member or friend. The advantage is that this person knows the grantor’s values and wishes, though he or she may need training to understand the responsibilities of the role. The danger may be that he or she gets caught up in family pressures. A corporate or an individual professional can also be trustee. Though the image of a corporate trustee is a bit stodgy or impersonal, this trustee has the advantage of professional expertise and continuity. If the trustee moves or dies, the corporation will replace him or her.

A trust can be an important tool for planning, LaValle says, for persons with high net worth. Given the current $3.5 million estate tax exemption, tax benefits are not a factor for people whose estates will not exceed the limit. In 2010, however, the estate tax exemption will revert to the 2000 level of $1 million. Congress can change this in 2011 but it is not clear what the action of the legislature will be.

Sometimes a person wants to leave a legacy of commitment to a cause that she holds dear. There are several ways to transfer assets to a not-for-profit organization. One can give a gift of cash, appreciated assets such as stock, a paid-up life insurance policy or property to the chosen organization. A gift of up to $12,000 will reduce taxable income by that amount. One can leave instructions for distribution to a charity in a will. Or one can establish a charitable trust.

 With a Charitable Remainder Trust, the donor receives a specified distribution of income from the charity during her lifetime. Assets that remain in the estate after death of the donor belong to the charity. A Charitable Lead Trust holds assets and pays a percentage of income from the assets to the charity for a fixed number of years. At the end of the specified term, remaining assets are distributed to one’s heirs. One can also specify a charitable rollover from Individual Retirement Account.

There are tax benefits for making charitable gifts. However, the tax laws that govern charitable gifts are likely to change in the near future, says Mark LaValle. Most of the large, mature charities have planned giving professionals to advice donors. It is important to work with someone who has professional experience in this field.

There are many ways to leave a legacy. The first step is to think about your values and your particular circumstances.