Dealing with end-of-life planning is never fun; even the financial portion is a long conversation that no one wants to have. Let’s first stress that we aren’t attorneys or accountants, and that it’s best to consult those professionals when finalizing a strategy for transferring wealth between generations. Nevertheless, we’re often asked questions about this process, and may be able to offer some insight on the subject.
First understand that, while a trust may be the first thing most people think of when they think about transferring wealth, not everyone needs a full-blown trust. Almost everyone, on the other hand, does need a will and should have one prepared.
For most assets — especially those that are more liquid — there are some great ways to transfer money to heirs. While each has different tax consequences (hence the need to consult an accountant), simply avoiding probate court can be extremely helpful when the time comes.
Another qualification I need to make at this point is that there isn’t much that can be done with regard to 401(k) accounts, IRAs and other tax-deferred accounts. All that anyone can do when it comes to transferring these types of assets is to make sure he or she has updated beneficiaries on file with their accounts. Likewise, there isn’t much to be done to reduce tax consequences for heirs since the principal holder of the account has been receiving a tax benefit for deferring income.
Taxes and transfer of nonretirement assets can be trickier. This is where some of those more fortunate families and individuals employ trusts with varying degrees of complexity. For most people, however, Transfer on Death or Payable on Death accounts can make the transfer of assets to heirs fairly straightforward and certainly help avoid the hassles of probate.
Joint accounts with rights of survivorship are another great way for investors to steward assets until they are left to heirs. Investors can establish joint accounts with anyone — not just a spouse. Joint accounts can be established with kids, grandkids, nieces, nephews, cousins, neighbors, friends or even your favorite weekly columnist as the surviving account holder.
Sometimes it’s better to start early — and that’s certainly an option. While most of us never need to worry about the $5 million exemption to inheritance taxes, sometimes things come up that make it nice to start the process of transferring accumulated wealth to heirs before the end of life. Current tax law allows gifts of $13,000 per spouse per child per year without gift tax implications (example: a married couple could transfer $26,000 to each of their children every year without paying gift taxes).
For others who want to schedule early transfers to help children, grandchildren or other minors save for college or a down payment on a home, UGMA/UTMA (Uniform Gift/Transfer to Minor Accounts) can be extremely helpful for nonretirement assets. Of course, like anything else there are drawbacks, especially for those who don’t think their heirs have the maturity or responsibility to handle money.
Consider the UGMA/UTMA example: when the minor (account beneficiary) reaches the age of majority, any money in UGMA/UTMA accounts is legally theirs to use however they’d like — assuming, of course, they know where it is and who to call to get their hands on it. However, it’s illegal for parents gifting assets through these types of accounts to rescind their gift if they doubt their child’s decision-making skills.
When it comes to estate planning there are lots of options, and no two cases are alike. It’s always best to consult multiple advisors to get a list of options from each and their respective implications. Afterward, every investor needs to sit down and figure out what’s best for them. Like so many things in the investment world, there is no black-or-white, right-or-wrong answer; there are options. The challenge is to understand those options and determine the most comfortable solution.
Dock David Treece is a partner with Treece Investment Advisory Corp (www.TreeceInvestments.com) and is licensed with FINRA through Treece Financial Services Corp. He provides expert content to numerous media outlets. The above information is the express opinion of Treece and should not be construed as investment advice or used without outside verification.
