Wealth Transfer

Wealth transfer is a strategic approach to passing on or moving legacy, such as assets, property, and valuables, from the grantor or donor to the inheritors upon the demise of the grantor or during their lifetime. The fact that human beings are mortal and are born to die is inevitable. Thus, it serves the primary purpose of transferring the legacy from one generation to another. When a person dies, they leave behind their dependents who require their wealth to survive and fulfill their financial goals. Therefore, handing over the ownership of what an individual possesses to their family members and heirs becomes essential.

However, such decisions require meticulous planning and frequent reviews and revisions to ensure the successful transfer of the estate, thus necessitating the involvement of a legal and financial advisor. Moreover, the intergenerational transfer of assets and property can increase the tax liabilities of both the grantor and the beneficiaries. Therefore, estate planning strategies have a central role to play in such decisions. A proper wealth transfer program can facilitate wealth preservation, financial risk mitigation, higher interest earnings on assets, and negligible chances of a dispute during the probate process. Also, it is a myth that estate planning should only be undertaken by the affluent. Indeed, it is for anyone and everyone.

Given below are some of the legally structured ways of intergenerational wealth transfer:

1. Naming Beneficiaries: The most straightforward way of estate planning is to name the beneficiaries in the respective asset or investment document, which will automatically be transferred to them upon the owner’s demise.

2. Wills: The grantor can write a will, which is a legal document stating the names of the beneficiaries of their assets and property, who are liable to receive the legacy after their demise.

3. Trusts: These represent a legal relationship between the grantor and the trustee, whereby the latter promises to transfer the trust assets to the beneficiaries as per the wish of the former. The trusts facilitating wealth transfer include:

• Irrevocable Life Insurance Trust (ILIT): The trustor can form an irrevocable trust whereby the trust asset is their life insurance policy.
• Grantor Retained Annuity Trust (GRAT): The trustor can use some of their estate tax exclusion and lifetime federal gift exemption to transfer wealth to the beneficiaries.
• Generation-Skipping Transfer Trust (GSTT): It is a trust that facilitates gifting and estate transfer to the inheritors who are younger than the owner by at least 37.5 years, such as grand or great-grandchildren.
• Charitable Lead Annuity Trust (CLAT): The CLAT is formed to transfer a certain asset or money to the designated charitable beneficiaries. 
• Intentionally Defective Grantor Trust (IDGT): Such trust enables the grantor to keep aside specific assets from being considered for estate tax purposes and not income tax purposes.
• Spousal Lifetime Access Trust (SLAT): The SLAT is created to transfer assets from the donor spouse to the beneficiary spouse.

4. Family Limited Partnership: The other way is to create a family limited partnership where the legacy is jointly owned by the family members who act as general partners and limited partners in the FLP arrangement.

5. Annual Gifting: The owner can offer their assets and property to their inheritors in their presence as gifts. However, the Internal Revenue Service (IRS) charges gift tax and implements other regulations on the annual gifting limits.

6. Intrafamily Loans: One alternative is to provide wealth as loans to loved ones or family members for buying assets or real estate and making investments.

The senior generation often desires to transfer their legacy to the next generation or their dependents upon their death. It is called generational wealth transfer. However, such a wealth movement should be well-planned to avoid any high taxes and other potential issues. Some of the tips to prepare for wealth transfer are stated below:

1. The benefactors should always keep all the estate planning documents up-to-date in consultation with the legal advisors to affirm a seamless probate process.
2. The entire family should be involved in every decision regarding wealth movement, and the owner should consider the financial goals of every family member before planning their estate transfer.
3. It is equally important to make the next generation ready to manage the legacy which they will inherit. They should know how to manage risk and make financial decisions to ensure wealth preservation.
4. Although it is essential to leverage financial technology for managing family records and balance sheets, the primary concern is maintaining confidentiality while sharing, storing, or archiving such critical information.
5. It is often recommended to select an advisory team that holds experience in estate planning, investment, finance, business transfer, and taxation. Also, the team should be diverse and have a multigenerational understanding to make wealth transfer successful.

Generational wealth transfer is the handing over of responsibility to nurture, preserve, and grow the family legacy from the aged generations to their heirs. Let us understand how:

Example #1

Suppose Mrs. Daisy has the following assets and property:

• House in Paris worth $200,000
• Investment in stocks worth $100,000 and bonds worth $50,000
• Diamond and gold jewelry worth $85,000
• Car worth $40,000
• Bank balance of $25,000.

She has four children: Georgia, Sam, Michelle, and Rachel. She decides to transfer her wealth to her children equally. She hires an estate planner, who suggests the following strategies:

1.  Writing a will to transfer the house in the names of Georgia and Sam. Also, they are beneficiaries of the bonds, with ownership of 50% each.
2.  Creating an irrevocable trust to transfer the car and jewelry to Michelle upon Mrs. Daisy’s demise.
3.  Lastly, Rachel should be made the beneficiary in the stock investment and bank account.

With this strategy, each of them would receive almost equal estate, overlooking the exceptions that are subject to the change in estate value.

Example #2

According to the NBC News report -https://www.nbcnews.com/business/consumer/generational-wealth-transfer-baby-boomers-cant-save-gen-x-millennials-rcna128099, the anticipated wealth transfer from the baby boomers to their inheritors and charities is around $53 trillion over the next few decades. However, rising healthcare expenses for older individuals pose a significant financial challenge. Fidelity’s annual retiree health care cost estimate says that a single 65-year-old might require approximately $157,500 post-tax for retirement health care, while the healthcare cost for a couple would be approximately—$ 315,000. On average, individuals under 65 spend $5,209 annually on health care, compared to $7,540 for those over 65.

Indeed, 60% of lifetime healthcare spending occurs after the age of 65. Moreover, the health care costs escalate faster than the other expenses, with prices for health care items rising by 114% between 2000 and mid-2023. Thus, median annual costs for long-term care are $108,405 for a nursing home, $54,000 for assisted living, and $61,776 for a home health aide. Medicare typically excludes coverage for long-term care, dental, and vision care services. By 2050, the US is projected to have 84 million individuals over 65, significantly augmenting national healthcare spending.

The Internal Revenue Service (IRS) keeps an eye on the transfer of assets from one generation to another to ensure tax implications. Some of the prominent taxes imposed over wealth transfer include:

1. Estate Tax: Any transfer of property, business interest, real estate, or investment beyond the permissible exclusion limit is subject to estate tax for that extra value transferred as wealth.
2. Gift Tax: It accounts for all those tax impositions charged over the transfer of assets at a value lower than their fair market value under the gifting provision by the aged generations to their inheritors. At the same time, there are certain gift tax reliefs, including the lifetime exemption and annual gift tax exclusions.
3. Generation-Skipping Transfer (GST) Tax: The GST tax is levied at a flat rate on the estate transfer to the heirs who are more than 37.5 years younger than the donor.

However, these tax liabilities can be effectively curtailed through proper estate planning and strategic implementation. One such way is to form an irrevocable trust to prevent the inheritance from excessive tax liability over the inherited assets. Another method is lifetime gifting of the assets that aid in minimizing the taxable asset size by claiming lifetime exemption and annual gift tax exclusion. The other ways are forming CLATs, FLPs, and GRATs to limit the tax burden.