$80+ trillion.1
That’s the amount set to pass down over the next 20 years from older generations to their heirs.
Along with the joy of potentially providing life-changing money to your heirs, there may also be concerns about how to perform the transfer and whether they’re ready to responsibly steward the wealth. Because of these fears, many wealth creators (those that made the money) fail to set their heirs up for success upon a wealth transfer.
So if you’re planning on transferring wealth to heirs, there are several considerations to keep in mind—such as when to transfer your wealth, where the assets should be kept, and how to communicate your intentions. Just like many things in life, there are better and worse ways to transfer wealth to the next generation. Let’s walk through common questions.
Question 1: When should I transfer my wealth?
Is it better to gift your money when you’re still alive or after you pass? The short answer is it depends. Factors such as taxes and the intended use of the money come into play. In addition, some wealth creators prefer to gift while they are still alive in order to see the heirs enjoy the inheritance.
Many people think of a wealth transfer upon their death—an inheritance. We think it’s a mistake to think of generational wealth transfer as something that can only happen in the form of inheritance upon death.
One way to think about this question is to determine the expected value of your estate at your death. If you believe it will exceed the lifetime exclusion amount for the estate tax, which is $12.92 million in 2023, you may want to start strategically looking at ways to gift some of your assets while you’re alive. There are ways to do this so that these gifts may not count toward your lifetime exclusion. But it’s complicated, so we recommend consulting your tax professional.
Another way is to consider how you want the wealth to be used. Would you like to enjoy watching your family take yearly vacations together? If so, then you may want to gift money while you’re alive so you can be part of these experiences.
Question 2: Where should I keep the assets I plan to transfer?
Whether you plan to transfer all of your assets to the next generation after you pass or want to start the wealth transfer process while you’re still around, there are several ways to structure your assets. Here are a few:
Transferring investments—such as stocks, real estate, and other liquid investments—to heirs can have some big tax benefits. While assets in a brokerage account can be considered in the taxable value of an estate, they do get a benefit known as a step-up in basis.
As an example, let's say that you bought a stock 30 years ago for $5 per share. It’s now worth $100 per share. If you were to sell it today, your $95 profit would be considered a taxable capital gain. However, if you were to leave that stock to your heirs, their cost basis would be adjusted to the share price on the day you pass (the current market value), and they could sell it with no capital gains tax whatsoever. As our Head of Financial Planning, Megan Brinsfield, quips, “Death is the classic tax-avoidance maneuver!”
There are many types of trust accounts, and they can be quite complex, but the general idea is that a trust is a type of legal entity designed to transfer all or some of an individual’s assets to another entity—whether it’s a person, group of people, or organization.
For example, a living trust allows you to use your assets during your lifetime but can make it easier to transfer those assets to your intended heirs upon your death by avoiding probate. And if the living trust is irrevocable, meaning that it cannot be changed by the grantor, it moves the assets out of the grantor’s name immediately and can help reduce or avoid future estate tax burdens. There are downsides to trusts as well, including the cost of setting one up, so be sure to consult an estate planning professional to determine if one might be right for you.
- Gift to a 529 for education
If you want to transfer some of your wealth to younger heirs, college savings accounts like 529 Savings Plans offer the ability to transfer wealth and, in some states, deduct or receive a credit for that gift on your own tax return. Not only can there be significant state tax breaks for contributing to a college savings plan, but high-net-worth individuals can benefit from a special provision that allows a contribution of as much as five times the annual tax-free gift exemption with no tax consequences whatsoever.
It's also worth noting that if you have any heirs that are in college, any tuition payments made directly to an accredited educational institution are completely exempt from gift taxes, regardless of how much the tuition bill is. (Note: Medical expenses paid directly to the provider enjoy the same gift tax exemption if you have any relatives facing large healthcare costs.)
Question 3: When should I discuss my wealth transfer intentions with my heirs?
We believe the answer to this question is to have conversations early and often. Perhaps the most important piece regarding generational wealth transfer is also what’s viewed as the most difficult part—talking about it. Simply put, in American culture, talking about money is often regarded as an uncomfortable topic and, therefore, can often be neglected. Many of us are taught from an early age that it is impolite to talk about money in the same category as religion and politics. In fact, data show that more than two-thirds of people would rather talk about their weight than their money.2
However, when it comes to planning for a generational wealth transfer, the exact opposite is true. Another survey found that three-fourths of 20- and 30-somethings who expect to inherit $1 million or more feel they would be better prepared for their future by talking about it.3
Unfortunately, 30% of Americans don’t even know if their parents have a will, and another 40% have no idea what is in their parents’ will.4 With 76% of high-net-worth adults planning to leave an inheritance to their children5, it’s clear that there’s a serious communication imbalance.
So, we believe having conversations with your heirs about your estate plan can go a long way to preparing them. It can help prevent conflict between family members if your plans are known all along. These conversations can also ready your family for the technical aspects of a wealth transfer, such as who will have power of attorney over financial matters, where important documents are located, and how to find account information.
Where do you start these potentially uncomfortable conversations?
Begin with a broad-based chat about your intentions. You don’t need to discuss actual numbers right away or who is going to inherit what. One great place to start the discussion is by talking about what you want the assets you leave behind to mean to your heirs.
For instance, do you want them to use a portion of it for charitable purposes after you’re gone? Or is it your hope that they use some of the money to pay for their kids’ college? Perhaps you want them to leave your money invested in a certain way.
Real estate transfers are also common. Express your desire for these assets as well. For example, would you prefer that a house stays in the family as a gathering place? It’s also fine if you have absolutely no preference when it comes to what they do with the money or other assets they inherit. If that’s the case, say so.
Of course, once they inherit the money, it will largely be their decision, but these kinds of conversations can help set them down the right financial path and can be a great way to start talking about their future inheritance in a relatively comfortable way.
What’s your best course of action?
Every family’s financial situation is different, and there’s no right or wrong way to pass along wealth to future generations. While there may be better or worse ways to structure a transfer from a tax perspective, your intentions—how you want your wealth to be used—should be the deciding factor.
If you want to explore the best ways to plan for your own generational wealth transfer, it could be a smart idea to seek the advice of an estate planning attorney or Wealth Advisor who can tailor a plan that best meets your needs. While a Wealth Advisor at Motley Fool Wealth Management can counsel on tax efficiency and general tax considerations, we do not (and are not permitted to) provide tax or legal advice. Clients who need such advice should consult tax and legal professionals.
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