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What are some effective strategies to transfer wealth to my next generation? © kokouu via iStock
Oct 24, 2016

What are some effective strategies to transfer wealth to my next generation?

Due to the complexity of the income and estate tax code, passing assets to future generations is not as straightforward as it may appear. The first thing to consider when planning to pass assets on to your next generation, is what your goals are. Some of the more common goals among wealthy families include: maximizing your wealth transfer to the next generation, protecting your heirs from creditors, controlling assets, avoiding or limiting estate taxes and incorporating charitable efforts. There are many different estate-planning strategies that can be implemented, depending on your goals. The following are some effective techniques we’ve employed to support many of these objectives:

1. ANNUAL GIFTING

This is one of the simplest ways to pass wealth on to your next generation. Each individual may gift up to $14,000 annually to each heir; for married couples, this would equate to $28,000 per year. There is no gift tax return required and for larger families, this strategy can result in a large transfer of wealth over time. This is a great strategy for families who are looking for a simple way to move assets to their next generation, and are not worried about controlling assets or protecting the assets from creditors.

Passing assets to future generations is not as straightforward as it may appear.

2. IRREVOCABLE LIFE INSURANCE TRUST (ILIT)

This strategy was very common when the lifetime exclusion was low, and many individuals found themselves in an estate tax situation where liquidity would be needed to pay the estate tax. With an ILIT, you obtain a life insurance policy, with the owner being a trust outside of your taxable estate. Each year, you gift premiums to the trust to pay for the policy. Upon your death, the death benefit of the policy is paid out in trust, and avoids any income or estate taxes. An ILIT accomplishes the goals of protecting assets from creditors, allowing some control over the assets and avoiding estate taxes.

3. GRANTOR RETAINED ANNUITY TRUSTS (GRATS)

A GRAT is an estate-planning strategy that is a little more complicated, and is used to “freeze” an estate. What this means, is that you try to place most of the future growth of certain assets outside of your taxable estate. The strategy involves choosing assets that have high growth potential or present a valuation discount, and aims to earn more than the interest rate set by the government. The difference between the growth and the interest rate is what will remain outside of the estate. One additional benefit to this strategy is that all taxes are paid by the person or entity loaning the assets to the trust. This results in allowing the assets outside of your taxable estate to grow, in essence, income tax free, while also reducing the assets in your taxable estate. You therefore gain the equivalent of a free gift to the trust. A GRAT accomplishes the goals of protecting assets from creditors, avoiding estate taxes and securing control of asset distributions via trust documents.

There are many estate-planning strategies that will help transfer assets to your next generation effectively. To determine the best strategy for your situation, you should first identify the goals you have for your assets. The next step is to work with a trusted advisor to develop a comprehensive plan to help achieve your wealth-transfer goals.

Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy (including the investments and/or investment strategies recommended and/or undertaken by Waldron), or any non-investment related services, will be profitable, equal any historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Waldron is neither a law firm nor accounting firm, and no portion of its services should be construed as legal or accounting advice. A copy of Waldron’s current written disclosure statement discussing advisory services and fees is available at www.waldronpw.com. The scope of the services to be provided depends upon the terms of the engagement.

This article was originally published in the October/November 2016 issue of Worth.

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