When one person or entity transfers wealth or assets to another, it is called wealth transfer. The transfer can happen either during one’s lifetime or after one’s death. Wealth transfer strategies refer to the methods used to transfer wealth in the most tax-efficient and effective ways. Below are some popular wealth transfer strategies to consider.
Gift giving is a commonly used wealth transfer strategy. It involves giving a gift to someone, which can be in the form of cash, securities, real estate, or personal property. The annual gift tax exclusion allows an individual to give up to a certain amount, tax-free, to any number of recipients. In 2023, the annual exclusion is $17,000. This means that an individual can give up to $17,000 per person per year to as many different people as they wish without incurring any gift tax liability. The annual exclusion amount is subject to change, so check with the IRS before making gifts. (It is important to note that this exclusion applies to federal taxes only– it does NOT apply to transfers made for the intention of qualifying for Medicaid Long-term care benefits.)
Trusts are legal entities that can hold and manage assets for the benefit of designated beneficiaries. There are many different types of trusts, including revocable and irrevocable trusts. Revocable trusts allow the creator to retain control of the assets during their lifetime and can be changed or revoked at any time.
Irrevocable trusts, on the other hand, cannot be changed or revoked once they are established. They are often used to protect assets from creditors, reduce estate taxes, and provide for beneficiaries. Irrevocable trusts can be a good option for people who want to qualify for Medicaid benefits and not spend all their assets on long-term care.
Family Limited Partnerships
A Family Limited Partnership (FLP) is a type of partnership that is often used to transfer assets within a family while retaining control over them. An FLP is created by transferring assets, such as real estate, stocks, or businesses, into the partnership. The partnership then issues shares to family members, who become limited partners. The general partner, typically the person who created the partnership, retains control over the assets and manages the partnership.
Charitable giving is a popular way to transfer wealth and reduce tax liability. By donating assets to a qualified charitable organization, an individual can receive a tax deduction for the value of the donation. Charitable giving can also be structured through a Charitable Remainder Trust (CRT). This allows an individual to donate assets to a trust and receive an income stream for a specified period. After the trust term ends, the remaining assets are transferred to the designated charitable organization.
Educating yourself on life insurance can be a useful tool for transferring wealth to future generations. Life insurance policies can provide tax-free benefits to beneficiaries. In addition, it can be used to pay estate taxes or other expenses. Life insurance policies can be set up in a way that allow the policy owner to transfer ownership of the policy to a trust or another individual.
Finding the Right Strategy
There are many different wealth transfer strategies available, each with their own advantages and disadvantages. These strategies can have complex tax implications and legal requirements. So, it is important to work with a professional to ensure that the transfer is done in the most efficient way. Consult with a financial advisor and an estate planning attorney before using any wealth transfer strategy.
This article offers a summary of aspects of estate planning and elder law. It is not legal advice and does not create an attorney-client relationship. For legal advice, contact our Ruston, LA office by calling us at (318) 255-1760.