No matter the size of your estate, you owe it to your loved ones to effectively communicate your final wishes—so they aren’t left feeling uncertain during an already stressful time. To do this, you’ll want to incorporate wealth transfer strategies into your overall estate planning efforts.
Wealth transfer planning is a simple yet powerful concept. Essentially, it’s predetermining how and to whom your assets will be transferred. This process is then facilitated through certain estate planning tools and strategies, which can help ensure assets are passed on in a tax-efficient and legally binding manner.
With some thoughtful planning now, you can be more assured that your assets and loved ones will be well-cared for in the future. Here are a few key components of wealth transfer planning to help you get started.
Wealth transfer planning is a critical part of the greater estate planning process, especially for those with sizable estates. It ensures that your assets are distributed to your loved ones in the manner you wish. Otherwise, it may be up to the courts to decide which beneficiaries receive what—and of course, the court’s decisions may not reflect your desires accurately.
When the transfer process is considered carefully beforehand, you also have an opportunity to minimize the tax consequences both for your estate and your beneficiaries (those who receive your assets as an inheritance). Even if your estate falls under the federal estate tax exemption limit, some states impose a state-level inheritance or estate tax—which can eat away at your loved ones’ inheritances.
Common Wealth Transfer Tools
With an understanding of why wealth transfer planning is important, let’s dive into a few of the most popular tools for transferring wealth effectively to your surviving loved ones.
You’ve likely heard of a last will and testament (or more commonly referred to as just a “will”), but you may not be aware of what, exactly, its functions are.
A will serves a few key purposes:
Your will is a good, foundational document to include in your wealth transfer and estate planning. It can help you divide and distribute assets including:
Keep in mind some types of assets and properties don’t belong in your will. Retirement plans and life insurance policies, for example, have their own designated beneficiaries on the accounts. In addition, property owned with someone else (called “joint tenancy property”) can’t be transferred in your will either.
It’s highly recommended that you work with an experienced estate attorney to prepare your will, as they can help you determine what belongs and what needs to be addressed elsewhere in your estate plan.
Trusts also allow you to transfer assets to your loved ones, but they can provide more protection and control over how and when the assets are distributed. Depending on how the trust is established, it may be able to help your estate avoid the probate process and potentially reduce transfer tax liability.
When establishing a trust, you can choose either a revocable or irrevocable trust. Each comes with its own set of benefits and considerations:
Revocable trusts allow you to maintain control over your assets for as long as you’re living. Also called a living trust, you’re able to “revoke” assets or make changes as you wish. This offers flexibility but lacks protection—particularly from taxes or creditors.
Irrevocable trusts do not allow you to make changes once assets are transferred to the trust. Though this option lacks flexibility, it does provide more protection. The assets transferred into an irrevocable trust are essentially severed from your personal estate, as they become the legal property of the trust. This can help reduce the size of your estate (which is helpful if you’re approaching the federal estate tax exemption limit) and protect your property from creditors.
If you incorporate charitable giving strategies into your wealth transfer plan, there are several ways to give strategically, including:
Developing a wealth transfer plan that accurately reflects your wishes, encompasses your entire estate, and takes important considerations (like taxes) into account generally requires the help of estate planning professionals.
An estate attorney can help you navigate and file complex, legally binding documents.
A tax professional and financial advisor can help you understand the role taxes play in the transfer process, identify opportunities to minimize their impact, and help you develop a plan that benefits both your estate and your heirs.
In addition, your advisor can work with your family members to discuss your final wishes and help them navigate the decisions that come with receiving a sizable inheritance.
You’ve spent your whole life building a sizable estate—one that you want to share with your loved ones in a meaningful way. To accomplish this, there are some steps you should be taking now to prepare your estate and your family for the future.
To help you get started, we created this free downloadable Estate Planning Guide for High Income Families, which includes the five essential components of every comprehensive estate plan.