Transferring wealth from one person to another, especially in a family, is almost always a stressful matter. With piles of documents to sort out, laws to navigate through, and taxes to pay, wealth transfer can be a complicated process.
This is why you should look for wealth transfer strategies that let you reduce the stress of giving or receiving wealth from and to family members. These methods make the transfer easier, especially with the help of financial consultants.
There are several ways to transfer your wealth with less hassle. Here are some of the most effective ways to do so.
Best Wealth Transfer Strategies You Should Know
Take Advantage of Tax Exclusions
In the United States, the gift tax is one of the hurdles you will face when transferring your wealth. This tax is applied to any direct or indirect transfer of money or its worth without receiving its full value in return. Givers are responsible for paying for this.
The good news is you can give gifts annually without incurring taxes as long as you do not go above the limit. The annual exclusion for 2018, 2019, 2020, and 2021 is $15,000. The downside to this is that it will take several years before you fully transfer your wealth.
Education and Medical Payments
Aside from the annual limit, you can also transfer your wealth by paying for educational and medical expenses. This exclusion is applicable only if you pay directly to the service provider such as schools or hospitals.
While it lets you transfer your wealth to your family member via services, they will not be able to directly receive the money.
If you want to transfer wealth over the annual limit, you can do it through intra-family loans. This method lets you give loans to the receiver at extremely low-interest rates. This option is great for assisting family members to pay large amounts.
The downside to this is that the Internal Revenue Service (IRS) rates change per month. Moreover, the transfer is only temporary because it is literally a loan. Plus, your proper loan documentation is required to show that it is not a gift.
Selling to IDGTs
Another option is to sell assets to an intentionally defective grantor trust (IDGT). This is a financial planning strategy that freezes assets to avoid estate taxes. However, any income generated using the frozen assets is still subject to income tax, which the donor pays.
This technique lets donors remove the assets from under their name but with a level of access to money. It is best for transferring wealth from a generation to two generations over. So, a grandparent can use this effectively for their grandchildren.
Keep in mind that proof of valuation is needed to avoid issues about frozen assets. This means that you should properly document the value of your assets at the time they were frozen.
To transfer wealth to your children, you can use a grantor retained annuity trust (GRAT). When you contribute assets to the GRAT, you place it inside the trust, but you can still receive fixed annuity payments for a specific number of years.
After the term is over, the trust will be distributed to the receivers. However, once the GRAT is established, you cannot add more assets, so make sure to consider the value of the assets you are placing into the trust.
The Bottom Line
Wealth transfer can be a meticulous process, especially if you want to avoid paying estate taxes. Transferring money is quite easy given the apps we have access to.
With these wealth transfer strategies, you can minimize the impact of the taxes on your assets while ensuring that your heirs will receive the right amount.