A Guide to Wealth Transfer Planning
An organized wealth transfer strategy can make for a seamless transition of assets and mitigate the financial burden on beneficiaries. It is important to understand what goes into wealth transfer planning, including the required documentation and key parties involved.
Key Takeaways
- The benefits of wealth transfer planning — and what can happen without a plan.
- A roadmap of the wealth transfer process and what to expect.
- The most common strategies and tools to help ensure an effective wealth transfer.
What Is Wealth Transfer Planning?
Wealth transfer planning is part of an overall estate plan. It outlines how your assets will be transferred to other people or entities during your life and after your passing, which can help to maximize the amount of wealth transferred.
Wealth transfer planning can provide peace of mind that your wealth will be transferred in accordance with your wishes. A well-constructed plan can also ensure that your heirs and beneficiaries receive your assets in a way that prevents unnecessary financial burdens and avoids wealth transfer challenges such as taxes and family dynamics.
The Wealth Transfer Planning Process
You must decide how, where and to whom your assets should be distributed. Hiring a financial advisor, tax professional or an estate planning attorney can help you evaluate your options.
Take Inventory
The first step in creating an effective wealth transfer plan is to take inventory of all your assets and liabilities, including bank, investment and retirement accounts, legal property documents and insurance coverages. Once you have the full picture of your assets and liabilities, you’ll have a clearer idea of what you’re trying to achieve.
Create a Will
A will is a legal document that lays out your asset distribution wishes and appoints an executor or personal representative responsible for carrying them out. It is important to review and update your will regularly to reflect any significant life changes, such as marital or familial changes, as well any updates to your assets, debt or end-of-life wishes.
Name Your Beneficiaries
Consider who you would like to designate as your heirs and beneficiaries — the individuals who will inherit your assets after your death. When choosing beneficiaries, you have the power to specify how much of your assets each individual or entity should receive. You’ll want to carefully consider your personal relationships and financial needs, both your own and those of your potential beneficiaries.
Retirement plans and insurance products usually have beneficiary designations that outweigh what is stated in a will. Review them and make sure the primary and secondary beneficiary designations for your life insurance policies, retirement accounts and similar accounts are up to date and reflect your wishes. You also should review designees on payable on death (POD) bank and transfer on death (TOD) brokerage accounts to ensure they are consistent with your plan.
Consider the Strategies That Work for You
There are many strategies and techniques to consider, such as annual exclusions, lifetime exemptions, trusts and specialized insurance products, each of which can significantly reduce the impact of taxes while protecting your wealth for future generations. All families’ circumstances are unique, so it’s important to seek professional guidance when creating a wealth transfer plan that maximizes benefits and minimizes risks.
The Core Tenets of Effective Wealth Transfer Planning
Moving significant wealth to beneficiaries does not always require complex transactions. The key to achieving the most favorable outcome is finding a balance between achieving your planning goals and complying with applicable tax laws. When establishing a wealth transfer plan, carefully consider the total value of your assets, including those that do not include beneficiary designation or co-ownership.
Tax Exemptions and Exclusions
Taxes play a significant role in wealth transfer planning, as they can influence the overall value of an estate and the way assets are distributed. It is crucial to have a detailed understanding of federal and state estate tax laws. These taxes are typically imposed on your cumulative estate value, including assets, property, bank accounts and other possessions. Discuss how you can minimize your tax liability with your tax and financial advisors and an estate planning attorney.
Tax law limits how much you can give to others without incurring gift or estate tax. Taxpayers can use powerful wealth transfer tools such as the lifetime gift tax exemption and the annual exclusion to strategically distribute wealth while leveraging both gift and estate tax benefits.
Generation-Skipping Transfer Tax
The generation-skipping transfer (GST) tax is a federal tax that applies to transfers that skip a living generation in inheritance or gift-giving, such as leaving assets directly to grandchildren. Currently, the GST tax exemption amount is equal to the gift and estate tax exemption. Individuals can shield a portion of transferred assets from the tax by allocating the exemption. Doing so will protect the assets and their future appreciation from estate and GST taxation.
Trusts
Transferring wealth through trusts offers greater flexibility and control than outright gifts. Commonly recognized benefits can include tax savings, management, ease of transfer, and protection against creditors and spendthrift behavior. In this sense, trusts can function as secure “vaults” for your wealth, preserving your authority over how your assets are distributed. Many types of trusts exist, each with specific attributes and tax implications, so be sure to review all of your options and choose a trust that makes the most sense for your situation.
Valuation Discounts
Valuation discounts, such as fractional interest, minority interest and lack of marketability, are percentages used to lower the value of the stock interest being transferred and are commonly available for nonvoting stock in a business, private investment partnerships, minority interests in limited liability companies, and limited partnership interests. By reducing the taxable value of assets, valuation discounts lower both your gift and estate tax liabilities. Valuation professionals assess the discount’s justification and determine its appropriate percentage. A qualified appraisal is required when filing gift and estate tax returns.
Life Insurance
Except in rare cases, the primary advantage of life insurance is the income-tax-free death benefit. Like many other inherited assets, the death benefit received by beneficiaries is generally exempt from income tax. Exceptions to this rule include items known as income in respect of a decedent (IRD), typically IRAs, 401(k)s and other retirement accounts. Unlike term life insurance, permanent insurance policies (e.g., whole life, variable and universal) include a cash value component that can grow over time. This cash value can be accessed through loans or withdrawals, which may trigger tax implications, or used to offset future premiums.
Life insurance can help replace lost income upon the death of a breadwinner, providing financial security for dependents. It can also be used to balance inheritances between beneficiaries. These situations of a family wealth transfer include when one child has already received significant financial assistance during their lifetime or is receiving a disproportionate highly valued asset, such as the family business. For many high-net-worth families, life insurance is used to cover in whole or in part the estate tax liability or provide immediate funds without requiring the sale of valuable assets at potentially disadvantageous prices.
How Can Glenmede Help?
The most important thing you can do to plan for an effective wealth transfer is to find a team of knowledgeable tax professionals, wealth advisors and attorneys you can trust. With more than 65 years of experience, Glenmede helps our clients create custom wealth transfer plans to protect assets and minimize taxes.
For more information on creating a wealth transfer plan, get in touch with a wealth planner by filling out this form.
Frequently Asked Questions
What is a wealth transfer plan?
A wealth transfer plan is a strategy for transferring assets to people or entities during your life and after your passing in accordance with your wishes, in a way that can maximize the amount of wealth being passed down while minimizing the taxes owed on that wealth.
How do I prepare for the Great Wealth Transfer?
Consider your assets, beneficiaries, tax strategies and timing — it is never too early to start planning. Consult with a wealth advisor, tax professional and attorney to create an effective wealth transfer plan as part of your overall estate plan.