Keeping Your Wealth Intact

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Get Your Estate in Order

If you don't have estate documents by your mid-40s, get them. It can be as simple as a establishing a will if your assets are not huge, Stevens says.

A will controls the transfer of your assets when you die. The part of your assets controlled by your will is called your probate estate, explains Charles Aulino, director of financial planning at Glenmede Trust in Philadephia. Many people also establish a revocable living trust (see BusinessWeek.com, 6/18/07, "Estates: Keeping It All in the Family"). This lets you transfer assets out of your name, but you continue to have full use, benefit, and control while you're alive, Aulino says. Anything placed in this trust during your lifetime is removed from your probate estate. This can reduce some of the expenses and delays associated with probate estate settlement upon your death.

Dan Schrauth, a wealth adviser at JPMorgan Private Bank in San Francisco, notes that many people in California have a revocable trust because the probate process in that state can be very lengthy and expensive.

Another advantage of the revocable living trust is you can designate a trustee that can assume financial responsibilities for you if you become unable to manage your affairs.

You also need to set a durable power of attorney, which gives a trusted person the authority to sign documents on your behalf if you become mentally incompetent while you're alive.

An advance medical directive, or living will, states whether you wish to use extraordinary medical treatment if you become extremely ill or injured. And a medical power of attorney document allows you to give someone the power to make specific decisions about your medical care if you are unable to do so.

Keep Wealth in Your Family

Make sure you have named a trusted family member as the beneficiary of your retirement plans so they can continue to see those assets accumulate tax-free.

To keep wealth in the family over multiple generations and avoid estate taxes, financial planners recommend setting up a dynasty trust (see BusinessWeek.com, 6/29/07, "How Trusts Work"). This is a good idea if your children don't need all their inheritance money, because it can benefit the next generation without being in your taxable estate, says Schrauth.

He notes that dynasty trusts are usually established in a state that permits perpetual trusts, such as Delaware or South Dakota. And with the proper planning, it's also possible to avoid state-level income tax on the accumulated income and gains, he says. "This is a very powerful estate-planning tool," Schrauth says.

Another way to minimize estate taxes and transfer wealth is to make gifts of cash or property to family members. Up to $12,000 per person a year can be gifted outright or put in a trust for their children without being subject to the gift tax (the limit over your lifetime is $1 million without being subject to the gift tax). Grandparents can also help pay for your children's education expenses. Tuition payments made directly to an education institution are not classified as taxable gifts, Schrauth says.

One last tip: While you're getting organized, create a "doomsday book" that lists all of your account numbers, phone numbers of institutions, and important documents such as your will. Keep it in a safe and easily accessible place for your family in case something happens to you.

McCormack is senior producer for BusinessWeek.com's Investing channel.