Wealth Transfer Techniques

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Given how each president more often than not tweaks the country’s tax rules as well of other related policies after entering the White House, it’s a good idea to revisit certain techniques in order to reconfirm their effectiveness in a new policy environment. One set of techniques centers around wealth transfer.

A common question that recurs every few years is what are ways to pass money to future generations in the family without increasing the donor’s nor the beneficiary’s tax burden?

Below are five techniques to consider:

Life Insurance: While it’s slightly more common to use life insurance to support surviving family members after the death of a loved one, it also may be used to pay taxes on estates. And if the insurance is payable to beneficiaries through an irrevocable trust, you may avoid having the proceeds count towards the value of your overall estate.

Business Buyout: Many families in this economy are launching their own businesses. Retiring shareholders can sell their portion of the business to younger generations in the family in an internal family buyout. The retiring shareholder then receives cash to help fund retirement, and the family sustains the independence of their family’s company while receiving potentially substantial tax benefits if the buyout is structured correctly.

Account Beneficiaries: Adding a beneficiary to your 401K/IRA/Life Insurance/et al enables beneficiaries to have more choices in how they receive the proceeds from an inherited account instead of forcing a family member to receive a lump sum and an immediate ordinary income tax bill.

Gift Transfers: “Giving while living” has the benefits of reducing one’s taxable estate while leveraging the kinder gift tax rules to transfer wealth. This technique may generate estate tax savings upwards of 25%, and in some cases even more savings may be possible.

Transfer on Death: Non-retirement accounts may be enhanced with a transfer on death policy, which may be beneficial if your non-retirement account has securities bought at a much lower price than the present day value (e.g., low cost basis securities). The basis or purchase prices of your securities are adjusted to their fair market value upon your death, which may provide your beneficiary with tremendous capital gains tax savings if this results in a step up in basis.

Regardless of the method, talk with a qualified advisor to help ensure that your wealth transfer strategy reflects the latest policy changes.