A wealth transfer occurs when assets or wealth are transferred from one party to another. 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.
Gifts
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.
Trusts
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
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), which 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.
Life Insurance
Life insurance can be a useful tool for transferring wealth to future generations. Life insurance policies can provide tax-free benefits to beneficiaries and can be used to pay estate taxes or other expenses. Additionally, 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 and effective way. Consult with a financial advisor and an estate planning attorney before using any wealth transfer strategy.
For legal advice, please contact our Chicago area offices by calling 312-878-0155. Our probate and estate planning attorneys can make provisions for all documents to be unambiguous, increasing the probability of avoiding any potential future litigation.