Wealth transfer planning 101

Establishing a solid financial foundation is a significant achievement that can benefit families for generations. While it may be difficult to think about a time when one won’t be around to offer support, having a wealth transfer plan in place can help provide for your family. Such a plan may ensure that loved ones will have the resources they need to navigate life effectively. By considering how to transfer assets, individuals can help set their families up for success and demonstrate a commitment to their future.

What is a wealth transfer?

A wealth transfer is when money or assets are passed from one person to another person or group of people, typically in the event of their passing. Financial experts say that a “Great Wealth Transfer” is underway in this country, where older generations, like Baby Boomers, are estimated to pass down $84.4 trillion in assets through 2045, with $72.6 trillion in cash, investments, homes and other valuables going directly to their heirs. This trend is predicted to shift how money is used and invested in the future as younger people receive this wealth and make their own financial decisions.

Creating a thoughtful wealth transfer strategy can help make a personal estate plan more effective so your wishes may be honored. Plus, it can help reduce taxes on an estate, minimize family confusion and disagreements, and offer financial support to loved ones after you’re gone.

What is the difference between an estate plan and a wealth transfer plan?

An estate plan is the process of outlining how assets will be managed and distributed after a person’s death, and a wealth transfer plan is an additional step that focuses on the specific strategies for passing that wealth, keeping tax implications and timing in mind.

Using annuities and life insurance for wealth transfer planning

Including life insurance or an annuity in a wealth transfer plan can help facilitate a smooth, tax-free transition of assets and provide financial security to an individual’s heirs.

Benefits of using an annuity as part of a wealth transfer plan include:

• Guaranteed income: Annuities can provide a steady income stream for beneficiaries, which can be especially valuable in retirement.
• Tax-deferred growth: The money in an annuity grows tax-deferred, meaning taxes are not owed on earnings until funds are withdrawn.
• Customization options: Annuities can be tailored to fit specific needs, such as lifetime payments or fixed terms, which can be beneficial for planning.

Benefits of using life insurance as part of a wealth transfer plan include:

• Generally tax-free death benefit: Life insurance payouts to beneficiaries are generally tax-free, providing heirs with a significant financial resource without tax liabilities.
• Liquidity for estate: Life insurance can help cover estate taxes or debts, helping ensure that other assets can be preserved for heirs.
• Estate equalization: It can be used to balance inheritances among heirs, especially if certain assets (like a family business) are not easily divisible.

When using annuities or life insurance as part of a wealth transfer strategy, it’s important to regularly review and update beneficiary designations so they align with current wishes. Discuss personal intentions with heirs to avoid confusion and choose a trusted executor of the estate to manage assets responsibly and according to your preferences. If there are any life changes, like marriage, divorce, or birth of a child, make sure beneficiaries are updated to reflect these changes.

Transferring wealth before death

Transferring wealth requires careful consideration of tax implications, personal circumstances, and family dynamics. Choosing to transfer assets to beneficiaries while you’re still alive can provide several benefits:

• Tax advantages: By gifting assets before their value appreciates significantly, it may be possible to reduce the taxable estate and leverage the annual exclusion.
• Control: Conditions can be set on how assets are used or managed, such as establishing trusts for children or beneficiaries.
• Flexibility: Gifts can be adjusted based on personal circumstances and the changing needs of their heirs. Allows a strategy to be adjusted if needed along the way.

The federal estate tax exemption for 2024 is $13.61 million (double for married couples). This means a person can transfer this amount tax-free during their lifetime or at death. Amounts exceeding this threshold may be subject to estate taxes.

Transferring wealth after death

Waiting to transfer wealth until after a person passes away can make sense in certain situations. For instance, assets transferred at death receive a stepped-up basis, which can significantly reduce capital gains taxes for heirs if they choose to sell the asset. This is particularly advantageous for appreciating assets like real estate or stocks.

Additionally, if there are unresolved family dynamics or uncertainties about how heirs will handle assets, waiting can prevent premature transfers that could lead to disputes or mismanagement. Proactive planning is important and allows you to iron out the details ahead of time to help streamline the process for loved ones and ensure they are financially prepared if the unexpected happens.

Whether a person chooses to transfer wealth during their lifetime or following their death depends on their financial goals, the needs of their heirs, and the specific assets involved. Regularly reviewing a wealth transfer strategy can help ensure it aligns with these evolving objectives.

How to prepare for a wealth transfer

Preparing for a wealth transfer involves careful planning to ensure that wishes are honored and that heirs are taken care of. Here are five key steps to help with the preparation:

1. Evaluate financial situation: Create a thorough list of bank accounts, real estate, personal property, investments, and retirement accounts, including their estimated values. Document any debts or financial obligations that could impact the estate, such as mortgages, loans, or credit card debts.
2. Define goals: Determine the desired outcomes for wealth transfer, such as providing for family members, funding education, supporting charitable causes, or ensuring financial security for a spouse. Decide whether to transfer assets during one's lifetime or wait until after passing, based on financial and family dynamics.
3. Gather financial documents: Put together tax returns, insurance policies, investment statements, and property deeds. Organize them in a secure, easily accessible location. Outline key information, such as account numbers, contact information for financial institutions, and login in details for any digital assets.
4. Create an estate plan: Work with an estate planning attorney to create necessary documents, including a will, trusts, and powers of attorney, clearly outlining wishes about transferring assets. Check beneficiary designations on accounts, annuities, and insurance policies align with the estate plan, regularly reviewing and updating as needed.
5. Communicate the plan: Have open conversations with family members about the wealth transfer plan where they can share their thoughts and ask questions. Discussing personal intentions can help prevent misunderstandings and conflicts in the future.

Preparing for a wealth transfer is a proactive step that can greatly benefit all parties involved. Meeting with a financial professional, estate planner, or tax professional can help you review your finances, define goals, understand the process, and make educated decisions about transferring your assets.

Neither Midland National nor its agents give legal or tax advice. Please consult with and rely on a qualified legal or tax advisor before entering into or paying additional premiums with respect to such arrangements.

The term financial professional is not intended to imply engagement in an advisory business in which compensation is not related to sales. Financial professionals that are insurance licensed will be paid a commission on the sale of an insurance product.

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