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Wednesday, February 13, 2019

A Holistic Approach to Transitioning Wealth


A successful transfer of your life’s work and wealth is more than an end-of-life event. It’s a journey through many decisions with a long-term impact on you, your family and others who will inherit your wealth. A holistic view, beginning with your goals and the interests of your heirs, can help you achieve those goals while limiting the impact of taxes.

Plans for Tomorrow Start With Actions Today

One common misconception about estate planning is that it’s all about what happens after death. In fact, a holistic approach focuses on actions during your lifetime that preserve your heirs’ financial stability after your death. You want to fully utilize provisions in the law that allow tax-advantaged transfers to your beneficiaries during your life and afterward, in order to minimize gift, estate and income taxes on your assets. Using a variety of processes, you can begin transferring assets now and enjoy seeing your heirs benefit from your life’s work.

  • Gifts. The latest tax law increased the annual gift tax exclusion to $15,000 — the amount you can give someone without triggering federal gift tax reporting and payment obligations. Your lifetime wealth transfer plan will likely include annual gifts to your heirs up to this amount.
  • Sale with an installment note. Intrafamily financing of asset purchases offers several tax advantages, particularly in a low interest rate environment. You recognize capital gain at the time of the sale, and interest income over the life of the loan, but you remove the future appreciation of the asset from your estate. A bonus: Depending on how you invest the proceeds, you can further diversify your investments to lock in gains and protect against downturns.
  • Sale to a grantor trust. This transaction is recognized as a sale for estate tax purposes, but not for income taxes. It’s useful when your total estate exceeds the exemption amount ($11.4 million for an individual, $22.8 million for a married couple), as it transfers the assets out of your estate but still lets you receive the income that they produce while you’re alive.
  • Gift to an irrevocable trust. This is another strategy for moving an asset out of your estate. Because it’s a gift, the asset maintains the same basis as when you held it. It’s a preferred solution for transferring higher-value assets and generates income for family members. For business and real property assets, you can also create a management structure to keep the operation running smoothly after your death.
  • Charitable trust. Planning to transfer assets to charity? A charitable remainder trust lets the organization benefit from the gift now, while you receive the income stream from the assets.

Such processes can help your heirs take full advantage of the wealth you’ll share. Each has its pros and cons. And each family has personalities, quirks and concerns to address in a wealth transfer plan. Communicating openly with your advisors and family is the biggest key to success.

Create a Trust Now, Minimize Your Estate Later

One important step to protect your wealth from a variety of challenges at your death: Place assets in a trust that will outlive you, letting your beneficiaries manage your estate outside the public probate process. The trust structure provides several benefits, including:

  • Privacy. If you want to understand how public your estate information can be if you don’t plan properly, look up the probate records for celebrities like Prince and Aretha Franklin, who died without wills or trusts. The probate process not only lists all your tangible property, it also tells everyone — including scam artists — who your beneficiaries are and what they’re receiving.
  • Controls on distributions. You can set terms and conditions on the assets you leave behind, protecting your loved ones from anyone who might mismanage the money — even themselves.
  • Continuity of ownership. A trust offers stability for businesses and real estate investments. Reduce your death’s impact on operations by creating a management structure now.

Once you decide to use a trust for wealth transfer, you must choose one or more trustees. They should be impartial and understand their fiduciary duties. Ideally, trustees should not be beneficiaries.

In some cases, you might want to name co-trustees. One might be an individual — a trusted friend or advisor — while the other might be a corporate trustee, such as a bank. The institution brings stability and experience in interpreting trust documents and complying with rules. The individual brings a human perspective, exercising discretion in line with the decedent’s wishes. For example, an individual trustee might approve an early distribution to an heir who has demonstrated fiscal responsibility.

Provide Opportunities for Generations to Come

Planning your transfer of wealth can be complicated, but it has a tremendous upside. A good plan lets benefits accrue while you’re around to enjoy them, and provides comfort that you’ve done your best to carry your legacy forward. Talk to your estate planning advisor to learn more about how a customized wealth transfer plan can benefit you and your family.


Considerations in Transferring Real Estate

Real estate requires special handling to ensure it transfers smoothly to recipients. Consider these issues:

  • Valuation of minority shares. IRS rules allow discounts when valuing minority interests in closely held businesses and real estate investments. Your beneficiary may inherit 40 percent of a real estate partnership worth $1 million, for example. But because the interest doesn’t represent control of the business and there’s no ready market through which it can be converted into cash, the actual value of the investment should be significantly less than $400,000.
  • Passion for real estate. A successful real estate portfolio depends on a committed and enthusiastic leader. Are any of your children ready for that role? If so, nurture their interest and position them to step up when you’re gone. But otherwise, don’t force anyone into a position that’s not a good fit.
  • Institutional support. Many banks and other financial institutions are better positioned to support more-traditional investments like stocks and bonds, rather than real estate. If your beneficiaries aren’t prepared to manage real estate, consider converting those assets to traditional investments during your lifetime.
  • Property tax reassessment. Even if the real estate is held in a trust or LLC, a change of ownership of 50 percent or greater might trigger a reassessment of property taxes in certain municipalities. This tax effect can be mitigated through lifetime transfers.
  • Estate tax deferral. In what amounts to a low-interest loan from the government, a provision of tax law allows heirs of a closely held business (including real estate) to defer the portion of the estate tax that is generated by that business. This election is taken upon filing the estate tax return.

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