Mother and daughter embracing after discussing wealth transfer.

5 things to understand about wealth transfer

From gifting money to children to transferring ownership of a home, it's important to understand some parameters for passing on inheritance.

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.

From worrying about estate taxes to keeping a house in the family, there are various concerns about the transfer of wealth. 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

Goals are different for everyone. Some people want to leave a large sum to their children, others would rather leave their assets to charity. Still others prefer to share their wealth with their family during their lifetimes.

It’s not unusual for parents to pay for their child’s education and use the remainder of their savings to enjoy retirement. Others may prefer to help their children along the way and pay for a wedding or first home.

Understand the tax law implications on gifting money

With a current exemption of more than $12 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, which usually do not have to go through 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 preparing to sell your home if they sell it. An attorney or financial planner may also be able to provide options to pay for nursing care in the event that Medicaid is involved.

Involve your family in wealth transfer discussions

It may be helpful to have a transparent conversation with your family about how you would like your wealth distributed. This conversation is also an opportunity to provide an explanation for your request and to answer questions your family may have. You may also consider sharing information about budgeting, using credit wisely, saving and investing to help loved ones manage their finances.

Neither State Farm nor its agents provide tax or legal advice.

The information in this article was obtained from various sources not associated with State Farm® (including State Farm Mutual Automobile Insurance Company and its subsidiaries and affiliates). While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. State Farm is not responsible for, and does not endorse or approve, either implicitly or explicitly, the content of any third party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. These suggestions are not a complete list of every loss control measure. State Farm makes no guarantees of results from use of this information.

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