What is it? Simply put, it is the process used to pass assets onto family members. The goal is to pass wealth to heirs while minimizing associated taxation.
If there are not appropriate measures in place for transferring assets it can cause arguments between members bringing unnecessary hardships on the family. Although causing a burden on the family by the decedent is never intended, these hardships occur all too often. In fact, according to research performed by the Williams Group, after studying over 3,250 families who transferred wealth, over 70% of those transfers failed (Carolyn, 2011).
Why are there so many wealth transfer failures? Breakdowns in communication. In general, we’ve heard all too often that poor communication between individuals can cause unwanted stress on those involved─this holds true for inter-generational wealth transfer. Difficulties in discussing estate planning often occur because many people tend to avoid thinking about the time after death occurs. Despite this tendency, it is essential for families to embrace the discussion if a smooth transition of wealth is to take place. With the typical root-cause of family strife residing in the unknown; not knowing who gets what, families that begin planning and communicating early on are able to circumvent unnecessary turmoil.
How to make the transfer process easier. With these causes of transfer failures in mind, having prior knowledge of each family members wishes becomes an important foundation in the facilitation of productive family discussion. According to the study’s 30% of families that were successful, they credit having a family mission and strategy in place through a broad and well thought out plan (Carolyn, 2011). Gathering this prior knowledge can be done at family gatherings throughout the year with holiday time proving to be the most opportunistic. Upon completion of the gathering process, it is recommended that the family seek the services of an estate attorney to assist in documenting their findings in the form of a last will and testament. It goes without saying that having a well-documented will in place prior to the start of transfer discussions serves as a sound roadmap encouraging a successful outcome. After the wishes are determined and documented, it is important to look at the possible tax implications.
Tax treatment of wealth transfer. As with what seems like everything else in our lives, there are taxes to be paid. This is no different with the transfer of wealth. Depending on the amount of wealth being transferred, there will be a different amount of tax paid on the transfer of assets by the transferrer, known as a gift tax. Extreme taxation can be avoided if you decide to allocate different amounts to each individual that is not too substantial. One of the most effective strategies for minimization of taxes is to set up a trust where smaller amounts of money can be placed and not be subject to estate taxation. According to an article obtained from Investopedia, one of the most efficient methods of minimizing estate tax is to move assets into an Intentionally Defective Grantor Trust, or IDGT, through combining a modest gift with an installment sale of the property. The normal way of doing this is by gifting 10% of the asset and having the trust make installment sale payments on the remaining 90% (Cussen, n.d.). Note that the gift tax is often confused with estate taxes. Many people believe that if they receive a gift, they will be taxed, however, it is the gifter that will have to pay gift tax.
Carolyn, R. (2011, 12 09). Wealth Transfers: How to reverse the 70% Failure Rate. Retrieved from Forbes: https://www.forbes.com/sites/carolynrosenblatt/2011/12/09/wealth-transfers-how-to-reverse-the-70-failure-rate/#5ff484e62879
Cussen, M. C. (n.d.). Tax-Efficient Wealth Transfer. Retrieved from Investopedia: https://www.investopedia.com/articles/retirement/07/reduce-estate-tax.asp
Melissa, C. (2015, March 30). Intergenerational Wealth Transfer. Retrieved from Milestone Financial Services: http://www.milestonefinancial.com.au/articles/intergenerational-wealth-transfer
The Gift Tax. (n.d.). Retrieved from intuit Turbotax: https://turbotax.intuit.com/tax-tips/estates/the-gift-tax/L1sFpFeXV
Top ten reasons to have a will. (n.d.). Retrieved from Findlaw: https://estate.findlaw.com/wills/top-ten-reasons-to-have-a-will.html
Williams, C. (n.d.). Intergenerational Wealth Transfer: Talking about money. Retrieved from Pavilion: https://www.pavilioncorp.com/intergenerational-wealth-transfer-talking-about-money/
Wills and powers of attorney. (2017, October 9). Retrieved from Australian Securities and Investment Commission: https://www.moneysmart.gov.au/life-events-and-you/over-55s/wills-and-power-of-attorney