One reason some people focus on building wealth over a lifetime is to be able to pass along resources and provide opportunities to their children and grandchildren. But it takes time and planning — as well as conversations about expectations and shared values — to have this transfer work well for everyone.
The concerns about wealth transfer vary, from worrying about estate taxes to keeping a home in the family. So what is the best way to pass on an inheritance and set up an estate transfer the way you want? Consider these steps.
Establish some wealth transfer goals
While some people want to leave a large sum to their children, others are more interested in bequeathing their assets to charity, says Zach Morris, co-founder of Paces Ferry Wealth Advisors in Atlanta. Still others prefer to complete a wealth transfer to their children during their lifetimes.
We have a lot of people who say, "I gave my kids a great education, and now my savings are there so I can enjoy my retirement," Morris says. "For other folks, helping their kid buy their first home or paying for a large wedding is something that’s very important."
Understand the tax law implications on gifting money to children
With a current exemption of more than $11 million per individual, the estate tax may not affect the vast majority of people, but it’s an important consideration for high-net-worth individuals. People who want to distribute their wealth during their lifetime can also take advantage of annual gift exclusions (check with a tax advisor for current limits). This allows individuals to make non-taxable gifts of a certain amount per year to as many people as they want — meaning that a couple could give their four grandchildren a larger total per year, tax-free.
Utilize transfer-on-death accounts
By designating beneficiaries, you can turn some of your accounts into transfer-on-death (TOD) accounts. This move allows these accounts to bypass the probate process.
Protect the wealth in your home
By working with a lawyer or financial planner, you may be able to reduce the amount your heirs must pay in capital gains taxes if they sell it. Also, some people legally transfer their homes to their children (either as a gift or through a trust) to try to avoid a scenario in which Medicaid recovers the value of the house to pay for nursing care.
Involve your children in wealth transfer discussions
According to a survey by RBC Wealth Management, 67 percent of individuals who were involved in family conversations about wealth felt like they had a greater understanding of what it entails as a result. Also, if wealth is going to last, it’s important for those who inherit money to have basic money management skills, such as budgeting, using credit wisely and saving and investing.