What Is Upstream Planning?

What Is Upstream Planning
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Doing some ‘upstream’ planning will take the guesswork out of what’s coming your way.

Estate planning with an eye to a future inheritance, known as “upstream planning,” can be essential where families pass significant wealth from generation to generation. Knowing these details in advance can substantially impact deciding how to manage the heir’s assets, as explained in the article “Expecting an Inheritance? Consider Coordinating Your Estate Plan with Your Parents” by Kiplinger.

What happens when information is kept private? In one example, a patriarch refused to share details, despite having children who had succeeded independently and didn’t need their inheritances. The family was left with an eight-figure estate tax bill.

Transparent and open discussions make sense. If a person has an estate large enough to need to pay federal estate taxes, inheriting more will add to their heir’s tax burdens. Parents may choose to leave assets to heirs through a trust. Money in a trust belongs to the trust, so in addition to tax benefits, the trust is an excellent way to protect assets from creditors, litigation, or divorce.

Trusts also take advantage of the GST—generation-skipping tax exemption. The executor of the parents’ estates can apply their GST exemption to the trust, which will not be taxed when distributed or passed to grandchildren, even if the grandchild is a beneficiary of the trust.

Business considerations also come into play. If a couple built and grew a business now run by their granddaughter, and the grandsons have had little or no involvement, their wishes should be clarified: do they want their granddaughter to be the sole heir? Or do they want the grandsons to receive cash, other assets, or any business shares?

Talking about multigenerational wealth early and often provides benefits to all concerned. The more money a family has, the more it makes sense to have those conversations, not only from an estate tax perspective. Those who created the wealth can use upstream planning to start conversations about their success, family values, and hopes for how heirs and future generations will benefit.

In some families, these conversations won’t happen because they think it’s too private or don’t want their children and grandchildren to feel they don’t need to work hard to become responsible citizens.

Communicating and coordinating are vital to success. Your estate planning attorney will be able to provide guidance, having seen what happens when upstream planning occurs and when it does not.

Reference: Kiplinger (Oct. 4, 2022) “Expecting an Inheritance? Consider Coordinating Your Estate Plan with Your Parents’”