Money passed down from one generation to another is called generational wealth. The concept seems simple enough, but there may be complexities when transferring money to family members. Building and sustaining wealth is the first step, but understanding how you can take steps to ensure that your assets are distributed according to your wishes, and in the most tax-efficient manner possible, is key.
Dan Loftus, Wealth Strategist at TD Wealth®, provides the following information that may be helpful to you and your family.
Build wealth
Of course, building as much wealth as possible is essential, but where do we begin? As soon as you can, start saving and consider investing. The power of compound interest can really help your nest egg grow. By creating a long-term wealth plan that focuses on saving and avoiding debt and sticking to it, you can set an example about disciplined money management for children and grandchildren.
Have the hard conversations
Talking about how to protect your money while you are living and your intentions for transferring your wealth to children or grandchildren can be emotional because it is always hard to discuss death.
But having those conversations with your professional advisors as early as possible—your independent trust and estate attorney, your accountant and tax advisors and your professional financial advisers, rather than waiting until circumstances require it, may give you peace of mind and ensure that your wishes are followed.
Estate planning
Estate planning often involves more than just drafting a will. A properly set up estate plan will seek to memorialize your wealth transfer instructions as well as avoid delays and reduce administrative costs.
To do that, you need to understand the assets you own and the most efficient way to transfer them to your children and grandchildren and beyond. This may include setting up one or more trusts and/or ensuring that you have selected named beneficiaries for assets like IRAs and accounts with transfer on death addendums and that you review your selected beneficiaries on a regular basis to ensure that these documents remain up to date in the event of new children and/or grandchildren.
Working with a trust and estate attorney as well as accounting and tax advisors can help you develop an estate plan that meets your expectations and most closely follows your wishes.
Choose the trust vehicle that works for you
Trusts can be a very effective way to ensure that your wishes and intention in transferring generational wealth are set forth in a legal instrument. A trust can either be revocable or irrevocable. Either way, a trust becomes the main wealth transfer document, and will distribute assets to beneficiaries outside of probate.
A revocable trust is within your control and can be amended and restated fairly easily during your lifetime which provides you flexibility in changing the terms of the trust and the beneficiaries. However, revocable trusts do not offer protection from creditors.
An irrevocable trust can give you protection from creditors. However, it is important to consider that an irrevocable trust is out of your control once it’s designated.
Step-up in Tax Basis
When someone dies, their assets such as real estate, stocks, bonds or even collectibles may receive a step-up in basis, or purchase price, when transferred to a beneficiary. This means that the cost of the asset will equal the fair market value at the date of death. If the beneficiary sells the asset immediately, they may not have to pay tax on that asset because of this step-up in basis. Keep in mind that assets in a revocable trust will get a step-up in basis but assets in an irrevocable trust will not get a step-up in basis.
Gifting money before death
As of January 1, 2024, the annual gift exclusion is $18,000 which means that an individual can gift, or give, up to $18,000 per year to any number of individuals without having to pay a transfer tax. This money is also tax free to the recipient.
There are benefits to giving wealth away earlier, whether it's having control over how the asset transfers or reducing total estate taxes due. But if you give an asset away during life, such as a piece of property, the beneficiary may not get that step-up in basis and may have to worry about paying tax.
Revisit as needed
Every couple of years, meet with your estate planning attorney and tax advisor to make sure everything is set up the way you want it to work and that there are no changes to laws that may impact your estate planning. If you plan to move to Florida, or another state for retirement, reach out to an estate planning attorney in that state to discuss necessary changes to your estate plans.
For more on personal finance topics
If you have more questions about personal finance topics that matter to you, visit the Learning Center on TD Bank’s website. You can find out more information about TD Bank's services at td.com.
We hope you found this helpful. This article is for informational purposes only and is based on information available as of August 2024 and is subject to change. This content is not intended to be used or acted upon with respect to any client's specific circumstances. For specific advice about your unique circumstances, consider talking with your qualified professionals.
TD Bank, TD Wealth® and their employees do not provide legal, tax or accounting advice.
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