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Wealth Transfer Strategies - How To Preserve And Pass On Wealth

Starting the process of transferring wealth requires making a lot of complicated choices and careful planning. This article goes into detail about wealth transfer strategies, which are the complex ways that people can protect their assets and easily pass on their wealth to future generations.

Alberto Thompson
Jan 08, 202425 Shares8462 Views
Starting the process of transferring wealth requires making a lot of complicated choices and careful planning. This article goes into detail about wealth transfer strategies, which are the complex ways that people can protect their assets and easily pass on their wealth to future generations.
Also, it aims to give you the tools you need to plan your legacy, from knowing the complexities of family partnerships to navigating the tax implications. Come with us as we break down the complicated world of wealth transfer and share tips on how to make plans that work and last.

What Is Wealth Transfer?

The term "wealth transfer" refers to the transfer of assets from one generation to the next. There are various strategies available for this purpose, each with its own distinct advantages and disadvantages. It is crucial to thoroughly explore these strategies before determining the most suitable approach for allocating your assets.

The Fundamentals Of Wealth Transfer

The fundamental objective of an estate plan is to ensure the orderly distribution of your property and finances to chosen beneficiaries while minimizing the impact of estate and gift taxation. Regardless of the estate's value, having a well-thought-out plan facilitates quicker and smoother access to inheritances for your heirs.
Under federal law, there exists an estate tax lifetime exemption enabling an individual to transfer up to $13.61 million to beneficiaries tax-free in 2024. This exemption is subject to inflation adjustments, typically increasing annually. However, there is an anticipated reduction at the close of 2025, coinciding with the expiration of the Tax Cuts and Jobs Act (TCJA), unless extended by law. Assets exceeding the exemption amount may be subject to a tax rate of up to 40% in 2023, a rate that has been in effect since 2013.
The estate tax encompasses all assets owned at the time of death, including partial interests in certain assets, excluding liabilities. The gross estate's overall value is not subject to taxation. Deductions are allowed for mortgages, estate administration costs, charitable gifts, debts held at the time of death, and bequests to a surviving spouse.

The Unlimited Marital Deduction

Under federal tax law, you have the freedom to transfer your wealth to your spouse without any limitations. These transfers are entirely tax-free, whether conducted while you're alive or as part of your estate after death.
However, it's important to note that this tax advantage is temporary. The subsequent passing of the second spouse may lead to the transfer of assets and property to other beneficiaries. Over time, the value of these assets might grow, potentially surpassing the available estate tax exemption.

The Portability Rule

Since January 2011, the Internal Revenue Code (IRC) has instituted a rule aimed at helping spouses alleviate the impact of the estate tax. In this arrangement, the first spouse to pass away can transfer any unused portion of their individual lifetime exemption to the surviving spouse.
For instance, if only half of the $13.61 million lifetime exemption has been utilized, the surviving spouse can supplement their own $13.61 million exemption with the remaining $6.8 million, resulting in a combined total of $20.41 million, thanks to this portability rule. It's important to note that the surviving spouse must file an estate tax return for the deceased spouse to exercise this option. Notably, only Hawaii and Maryland currently extend portability for state-level estate taxes.
Both spouses should be U.S. citizens for optimal application, as certain restrictions may apply otherwise. The Internal Revenue Service (IRS) recognizes same-sex spouses, provided they are legally married, though it does not acknowledge registered domestic partnerships or civil unions.
A hand transfering coins into another person's hand
A hand transfering coins into another person's hand

Common Wealth Transfer Strategies

If you are not married or wish to allocate a portion of your estate to individuals other than your spouse, federal law offers several additional strategies for transferring your wealth without incurring an excessive tax burden.

Irrevocable Life Insurance Trusts

Life insurance can serve as a valuable asset for wealth transfer due to its tax advantages. The proceeds are inherited without estate and income taxes, making it a strategic tool for various financial goals. Irrevocable Life Insurance Trusts (ILITs) play a crucial role in this strategy by removing the death benefit's value from the owner's taxable estate.
By excluding the death benefit from the taxable estate, the overall estate taxes are likely to be reduced, optimizing the amount passed on to the next generation. Moreover, the distribution of death benefit proceeds occurs according to the trust terms rather than as a lump sum outright. This approach can be relatively straightforward to implement if you already have a life insurance policy.
It's important to note that this option is irrevocable, meaning once the policy is placed in the trust, it cannot be easily removed. Additionally, if an existing life insurance policy is transferred into an ILIT and the policyholder passes away within three years of the transfer, the policy may be pulled back into the estate.

Engage In Annual Gifting

While giving away your wealth during your lifetime might seem simpler, the IRS has established rules for this scenario as well. The gift tax, although separate from the estate tax, operates in conjunction with it. Lifetime gifting can potentially reduce the value of your eventual taxable estate, prompting the IRS to implement both taxes to prevent circumvention.
However, there's an annual gift tax exclusion of $18,000 per person as of 2023, allowing you to make gifts up to this amount per recipient each year without incurring taxation. This exclusion is adjusted annually for inflation. The $18,000 limit is more generous than it may initially appear. For instance, a married couple could collectively gift $36,000 to their son ($18,000 from each spouse). If the son is married with two children, the couple could contribute up to $144,000 annually to their son's family.
Additionally, there's a lifetime gift tax exemption, which is shared with the estate tax. Gifts exceeding the $18,000 yearly exclusion can be applied to this lifetime exemption. The tax becomes payable only upon your death, and it applies only if the total value of your estate and lifetime gifts surpasses $13.61 million.
Similar to the estate tax, gifts to your spouse or a charity do not count against these limits. However, lifetime gifts can reduce the lifetime exemption, potentially diminishing the dollar-value protection for your estate.

Grantor Retained Annuity Trust

For individuals with an asset expected to appreciate over time and limited federal exemptions or reluctance to transfer a sizable asset outright, a Grantor Retained Annuity Trust (GRAT) can be a viable option. The objective of a GRAT is to exclude the appreciation of an asset from your estate while receiving annuity payments over a specified period.
The growth within the GRAT, occurring between the funding date and termination, is transferred to beneficiaries' estates tax-free. This effectively removes the asset's appreciation from your estate while providing you with annual annuity payments. This strategy is considered lower-risk and particularly effective for rapidly growing assets.
In the event of the grantor's death during the trust term, for estate tax purposes, it's as if the trust never existed, and the value of trust assets is included in the taxable estate. However, it's essential to note that GRATs can be costly, depending on the nature of the asset, due to the ongoing asset valuations that may be required.

Intentionally Defective Grantor Trust

An Intentionally Defective Grantor Trust (IDGT) is an irrevocable trust intentionally designed to be "defective" for income tax purposes. This unique structure allows you to continue paying the income tax on the trust assets, all while removing the value of those assets from your taxable estate.
IDGTs offer an effective strategy for eliminating future growth from your taxable estate. The IRS permits the grantor to handle the income taxes generated within the trust, preserving the trust's assets while simultaneously reducing the overall value of the taxable estate. Depending on your circumstances, selling assets into an IDGT may also be a viable option.
It's crucial to note that IDGTs are irrevocable, and assets transferred into them do not receive a step-up in basis. It is advisable to consult with a CPA to carefully consider the tax basis of assets before placing them into a trust to avoid unintended income tax consequences.

Spousal Lifetime Access Trust

A Spousal Lifetime Access Trust (SLAT) shares similarities with an Intentionally Defective Grantor Trust (IDGT) but with a key distinction: the primary beneficiary is the spouse. This arrangement is particularly suitable for those who anticipate the need for access to trust assets in the future.
Much like the IDGT, the SLAT offers the advantage of removing trust assets' value from the taxable estate. However, it provides an additional feature by allowing the grantor's spouse to withdraw assets from the trust if the need arises.
While the SLAT is irrevocable, it's essential to be aware that if the spouse, who is the primary beneficiary, passes away first or in the event of a divorce, the grantor loses access to the trust. Moreover, the IRS prohibits spouses from creating identical SLATs for each other, emphasizing the importance of consulting with an attorney experienced in implementing this strategy.

Form A Family Limited Partnership

A Family Limited Partnership (FLP) facilitates joint ownership of family-held assets among family members. Within the FLP structure, family members assume roles as either general partners or limited partners, with varying degrees of responsibility for managing the assets held by the FLP.
Parents and grandparents who contribute their wealth and assets to the FLP become partners, retaining the ability to transfer their partnership interests to other family members, including children and grandchildren. This approach can effectively minimize or entirely avoid gift and estate taxes, as well as shield assets from personal creditors.
However, the FLP must have a clear and definable business or investment purpose, according to IRS requirements. The partnership must be established in a manner that allows it to generate its income, and family partners are obligated to report this income on their tax returns for income tax purposes.
A man holding three bundles of dollar notes
A man holding three bundles of dollar notes

Wealth Transfer Mistake To Avoid

Crafting a plan for wealth distribution is just the initial step; there are additional considerations to ensure a smooth transfer that safeguards both your assets and the emotions of your loved ones. Here are key mistakes to avoid:

Maintaining Silence

Communication is paramount for a successful plan. It's crucial to let your loved ones know about the existence of your plan and provide a general understanding of its structure.
While detailed financial figures may not be necessary, discussing the overall framework, such as whether inheritance will be received outright or held in trust, allows for explanations and addresses potential questions. Additionally, if specific roles have been assigned, like trusteeship or power of attorney, it's vital to inform the individuals and clarify their responsibilities.

Overlooking Non-Financial Assets

While monetary assets often take precedence, it's equally important to explicitly outline any non-monetary assets being passed on and articulate your preferences for their handling. This includes items like collections and personal possessions with sentimental value, ensuring that your wishes regarding these non-financial assets are communicated and understood.

Neglecting Plan Reassessment

It's crucial to regularly review your wealth distribution plan, especially when significant life events like births, deaths, marriages, divorces, retirements, or sizable asset sales trigger it. Even in the absence of these events, a periodic review every five years is advisable.
This reassessment should encompass evaluating whether assets are designated to the right recipients at the appropriate times and re-evaluating the individuals entrusted to execute your document's wishes. For instance, as your chosen fiduciaries age, it may be prudent to reconsider and potentially adjust the roles assigned to them. Regular plan reviews ensure alignment with current circumstances and evolving preferences.

Wealth Transfer Strategies - FAQ

What Are Examples Of Wealth Transfer?

In some cases, proactive wealth transfer - the gifting of money and assets while a parent or grandparent is still alive - may be the most sensible option. Examples include gifting cash for your grandchild's university tuition expenses or aiding in the down payment of your child's first home.

What Is The Corporate Wealth Transfer Strategy?

The corporate wealth transfer strategy can be an efficient way to pass corporate assets to your loved ones. When the owner passes away, the corporation receives the policy death benefit and, typically, the accumulated investment growth, free of tax.

How Do Rich People Transfer Wealth?

There are 2 primary methods of transferring wealth, either gifting during a lifetime or leaving an inheritance at death. Individuals may transfer up to $13.61 million (as of 2024) during their lifetime or at death without incurring any federal gift or estate taxes. This is referred to as your lifetime exemption.


Deciding on the wealth transfer strategies that best suit your needs can be intricate, considering the numerous factors involved. The outlined approaches aim to minimize or eliminate future estate taxes, but it's crucial not to make tax considerations the sole motivator.
While taxes play a role, they should be one of several factors influencing your decision. It is essential to seek a plan that aligns with your overarching goals.
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