Many people want to leave a significant portion of their wealth and assets to their loved ones. They want to make sure that their family is taken care of and continue their living standards after passing on.
However, many risk factors could affect an estate’s capability to hang onto its wealth. These factors could bleed away the value of an estate, causing family members and descendants time and trouble in the form of court battles.
Jack Howley, an experienced corporate and personal wealth protection advisor, explains how people can protect their assets from several types of wealth eroding factors, including death and disability, taxes, lost opportunity costs, market correction, lawsuits, and inflation.
Perhaps the most common reason for wealth erosion is the death of the original property owner. Descendants and family members may not know how to manage an estate, and they may make mistakes that cause the value of the estate to plummet.
The most important thing that someone can do to preserve their assets before their death is to set forth a wealth structure that promotes generational money transfer. The adage that wealth only lasts for three generations can be avoided if people plan carefully.
One of the best ways to plan for the future is by creating trusts. A trust has a huge advantage over other forms of wealth planning because it restricts how money and property are distributed among the living.
There are several types of trusts that are useful to people when planning their estates. The first is the revocable trust. With a revocable trust, the original owner keeps control of their properties during their lifetime, but the ownership reverts to a beneficiary upon their death.
One of the most significant advantages of the revocable trust is that families do not have to go to probate court. It also prevents conservatorship, or when a guardian is appointed to take care of a person’s finances if they become incapacitated. A family member would immediately assume control in these cases.
Many people worry that estate taxes will reduce the amount of cash and property handed down to loved ones. Estate taxes only apply to American citizens’ top echelons, with the federal estate tax exemption coming in at $11.4 million per person. If a person’s net worth is this high, they must take as many precautions against tax losses as possible.
One of the easiest ways to reduce taxes after death is to give gifts. Handing off portions of a person’s wealth is effective in lowering taxes. People may gift as much as $11.4 million from their estate before running into the estate tax.
An irrevocable life insurance trust is another excellent idea when it comes to protecting wealth. This means that any life insurance proceeds will not be included in a person’s estate and will not be subject to taxation.
Lost Opportunity Costs
Opportunity costs represent the benefits an investor misses when choosing an alternative option. Opportunity cost is a major feature of economic theory. Since lost opportunity costs are not obvious, they can easily be overlooked. Investors and estate planners need to understand the opportunities they miss out on to make decisions about future investments.
The costs and benefits of every option must be considered when weighing an investor’s options. If opportunity costs are considered, individuals can make their decision-making more profitable.
Making small decisions can benefit opportunity costs. For example, trimming back expenses during the estate planner’s lifetime can lead to better returns down the road. Investing even the relatively small cost of takeout meals or going to the theater can lead to significant returns if done for an extended period.
Estate planners need to know all of their options when it comes to preserving their opportunity costs. Subtracting the value of the choice the investor made from the most valuable choice gives you an idea of how much opportunity has been lost.
For example, an investor who wants to preserve their estate value may choose to put money in a low-return, low-risk investment like a federal bond. The best option for this money may be a riskier, short-term investment. As always, estate planners need to balance risk with reward. Managing the different moving parts of an estate can lead to fewer lost opportunity costs.
Another example of a lost opportunity cost is failing to make new, high-quality investments. Taking some money out of underperforming investments is a must when profitable investments are on the horizon. For example, if the real estate market exhibits consistent growth, it may be a good time to invest in commercial or residential property. Having a portfolio that includes tangible investments can moderate the effects of market corrections and preserve opportunity costs.
One of the top reasons why opportunity losses come into effect is making poor decisions regarding personal finance. These decisions can affect your heirs after your passing. For example, it is imperative to pay off all debt well in advance of the time when an estate will be transferred to the heirs. Leaving debt behind can be a huge problem for the heirs and cause them to become entangled in legal battles. Avoid this situation at all costs. The heirs will be grateful for this consideration, and the estate will retain a higher value.
As much as possible, make sure that you are making the best choices for your investments. You may need a financial planner to help you formulate a list of the best ways to invest your money to preserve your wealth for future generations.
A market correction is another major headache for people who are planning their estates. The market may be experiencing a bubble or unnaturally high prices. This problem is well-illustrated by the housing bubble of 2007, which helped to set off the recession of 2008. Suppose investors have any suspicion that the market they have entered is experiencing a bubble. In that case, it is a good idea to diversify this investment and take some, if not all of it out of this situation.
Market corrections are defined as a loss in an investment’s value of 10 percent or more. The average correction lasts four months, and the average values fall about 13 percent. Market corrections are generally short-lived but can severely impact many people’s portfolios if they are not properly diversified.
A market correction is natural and sometimes necessary, but people who are trying to plan their estates can be lulled into believing that prices will always stay high. They should pay close attention to economists’ predictions regarding unnatural inflation of prices and any bubbles that may be building in size.
Market corrections can severely impact the ability to transfer wealth between one generation and the next. In order to compensate for this problem, it is a good idea to make sure that wealth is distributed equitably across many forms of investment. Getting out of situations where a market correction is imminent can save the value of a portfolio to be transferred to the heirs of an estate.
There is one caveat for market corrections. If an investor is in it for the long haul, a market correction may not matter very much. An accurate correction only lasts for a relatively short period of time. Long-term gains will wipe out the adverse effects. However, suppose the investor is close to the time when they may be transferring their estate. In that case, they should be aware of any potential market corrections and remove their money from this situation.
Understanding how market corrections work is a must when planning an estate. The difference between short- and long-term investments should be carefully considered. Estate planners should look into diversifying their choices to mitigate the effects of any market corrections that may occur.
If a person’s net worth is high, they may be subject to frivolous lawsuits intended to take advantage of their wealth. Some professions are much more prone to lawsuits than others, like doctors and financial advisors.
Protection against lawsuits is one of the more challenging aspects of estate planning, but there are methods to follow, keeping a person’s assets safe in this situation.
Asset protection trusts are a vital protector against wealth loss. When an estate is sued, having assets in the proper kind of trust can keep an opponent from accessing the money. “Umbrella insurance” may be another good step toward protecting assets, but frequently this insurance does not cover enough to protect against a major lawsuit.
Another method of separating assets is by setting up corporations and LLCs. This helps to divide personal assets from business assets. An LLC can help to protect beneficiaries from having their money raided by a lawsuit.
Some forms of wealth erosion are out of a person’s control. This category includes inflation. Inflation affects wealth because the dollar does not go as far when inflation takes place.
One way to protect an estate against inflation is by investing in real estate. Typically, home values and rents increase during periods of inflation. Real estate can’t be a magic bullet against inflation, but it receives better returns over time than most forms of investment. Real estate investment trusts (REITs) allow investors to treat their properties like liquid investments rather than wait to sell a property.
One way to protect assets in the event of the original owner’s disability is covered above. The revocable trust allows a person to control their assets. At the same time, they are physically and mentally capable of doing so, but they revert to a beneficiary as soon as they are incapable.
A crucial protector against disability is long-term care insurance. When a person has long-term care insurance, their assets will not be affected if they have to enter a nursing home. Nursing homes are notorious for bleeding away the value of a person’s estate. In the case of low net-worth individuals, the entire estate may need to be liquidated and sold to pay nursing home bills. Long-term care insurance may not be cheap, but it is one of the best ways to protect wealth in this situation.
Protecting Your Wealth
Protecting an estate against wealth erosion is one of the kindest things that a person can do to support their loved ones in the future. It is necessary to sit down with an attorney or financial advisor to plan out the trusts, insurance coverage, and portfolio allocation that is needed.
Jack Howley believes that every high net-worth individual should give a great deal of thought to protecting their assets for future generations. The factors affecting wealth erosion are not limited to those covered in this article. Doing due diligence and finding out what types of problems an estate is most likely to encounter can help a person plan what should happen to their assets after their death.
This article does not necessarily reflect the opinions of the editors or the management of EconoTimes