4 Secrets To Transferring Assets Between Generations

Warren Buffett is giving 99% of his wealth to charity.  He thinks large transfers of wealth between generations is highly destructive.

I agree with him.  However thoughtful families may have more moderate and practical goals.  They may want to transfer a vacation home to children, fund a grandchild’s college educations or provide assistance to loved ones during a difficult time.

As an ill or elderly family member reaches the end it’s worth discussing the topic with family members.

Money and families bring up a lot of tension.  I’ve heard several family coordinators of care talk about lost relationships, contentious arguments and lost financial resources.

However it’s important to understand what options you do have.  You won’t have control over everything but knowing basic strategies can help.  It will enable you to make the appropriate suggestion at the right time.

In this post I want to enable you with the broad strokes for how to transfer an individual’s assets from one generation to the next.

Options To Transfer Assets

Below are some of the simplest methods to transfer assets from an ill or elderly loved one to a future generation.

1. Provide A Gift

Each year the federal government allows gifts of $14,000 tax free.  Anything over that amount will be taxed at 40%.

40%!  Many estates are taxed at this rate as well.  One of the most effective methods to avoid this tax is to offer gifts over several years.

Here’s an example:

Tom is newly 24 and newly engaged.  In three years he is planning to buy a home and to start a family.  His budget is for a $500,000 and he’s expecting to pay roughly a 20% down payment.

Grandma would like to help with the down payment on the home and gives Tom $14,000 a year over 3 years.  After the three years are up Tom has $42,000 accumulated to apply to his down payment.

Think ahead.  If your loved one has a large amount of assets it may be worth it to begin transferring the assets several years in advance.

2. Contribute To A College Fund

Many families are happy to fund two types of activities: education and health expenses.  One of the most effective measures of support is to contribute early to someone’s college fund.

529 funds are tax free vehicles that allow families to save for an individual’s higher education expenses.

There are some state specific restrictions for 529 plans but in general they are the most flexible college planning investment vehicle.

Anyone can set one up (doesn’t need to be family).  All withdrawals spent on education expenses are withdrawn tax free.

Make sure you check the administration fees on the plan.  Some are 0.2% while others can be as high as 2%.  This can make a significant difference in the amount of funds you will have down the road.

3. An Irrevocable Trust

There are two major types of trusts.  An irrevocable trust and a revocable trusts.  The main difference is that once assets are transferred to an irrevocable trust they cannot be changed.  The individual no longer owns them.  The trust does.  In a revocable trust they can be changed.

The reason why family coordinators of care may wish to consider an irrevocable trust for their loved one is that the assets in an irrevocable trust are not subject to taxes upon death (called probate taxes).  The assets in a revocable trust on the other hand incur probate taxes.

Make sure your loved one has enough to live on before putting assets in an irrevocable trust.  It’s an important decision that you cannot go back on.

4. Pay Directly For Expenses

My grandmother pays for healthcare related expenses for some of her grandchildren.  The impact is significant.

Paying directly for expenses has pro’s and con’s.  It enables the contributor to have full control over how the money is spent.  If they want to help with a specific activity they can guarantee that their money is used for that activity.

The administrative burdens however of paying bills can be too much. It may be helpful to have a family member take on the role of legal power of attorney for finances.  They can then play this role for their loved one.

Setting up any financial transfer of assets between generations is not easy.  With the above strategies you know what options you have available to you.

Published: September 24, 2015
By: JP Adams

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