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Financial planning

Wealth transfer strategies: How to leave assets to your loved ones

Family illustration

We are about to embark on the greatest wealth transfer the U.S. has ever seen. By 2045, it's estimated that $72.6 trillion will be left to beneficiaries across the nation. If you're in a position to pass on even a modest level of money, property or valuables, now is the time to familiarize yourself with wealth transfer strategies.

From simple bequeathing to detailed annuities and trusts, the options abound for people in all financial situations. While setting them up may take some savvy legal and financial planning, effective generational wealth transfer strategies are vital to protecting and—ideally—prolonging family wealth. Here's a look at what you need to know about this important process.

Generational wealth transfer strategies to consider

Any strategy you choose simply involves setting up some processes ahead of time so that after your death, your money and possessions flow smoothly to the people you've chosen. When a person dies without having made any preparations, their assets may be fought over, frozen, seized, subject to fees or penalties, or other scenarios that can chip away at their value. With deliberate financial planning, there are many ways to transfer wealth to your loved ones:

Beneficiaries

Naming beneficiaries on any of your assets and life insurance contracts is the easiest and most efficient way to transfer assets to loved ones. It enables the administrator of the estate to follow though on the wishes of the deceased immediately without the need to go through the probate process. Those investments that don't have a provision for a beneficiary need to be listed in the will. To ensure you have beneficiaries listed on your accounts or contracts, contact each financial institution. You also will want to make sure they are up to date as life changes.

Wills

Legally executed wills are the most widespread wealth transfer strategy. A will allows you to document in detail who will receive each of your assets, but it doesn't take effect until you pass away. As part of the preparation, you name an executor who will carry out your wishes. It will be their responsibility to take care of your affairs, including being the voice of your interests in probate court if it's required.

Many states require wills to go through probate court, usually based on the value of the assets being distributed. This process can be lengthy and costly for your beneficiaries. Many people look to avoid probate court by using other wealth transfer strategies.

Trusts

A trust is a legal agreement that allows one party to hold assets for another. The person who creates the trust (the trustor) opens the account and transfers assets into the trust. An appointed manager of the trust (the trustee) then holds the assets and makes sure the terms of the trust are followed.

You can define the terms of the trust, including deciding who will be a beneficiary and when the trust will expire. Beneficiaries can receive trust assets after you pass away, while you're still living or at a time based on any conditions you want. When the trust expires, the beneficiaries get the assets along with any appreciation in value.

Trustors who want to reduce estate tax liability are especially drawn to irrevocable trusts. Assets transferred with an irrevocable trust are removed from the trustor's estate, reducing the amount of estate taxes the beneficiaries will have to pay upon your passing. Some common irrevocable trusts and their varying conditions include these:

  • Grantor retained annuity trusts (GRATs). GRATs allow the trustor (also called a grantor) to transfer assets to the trust in exchange for annuity payments until the trust expires. At the end of the term, anything remaining is given to the beneficiaries.
  • Intentionally defective grantor trusts (IDGTs). IDGTs are similar to GRATs, but instead of receiving annuity payments, you can sell your assets to the trust in exchange for interest-only payments. The interest rate is determined by the applicable federal rate (AFR) published monthly by the IRS. Many trustors sell assets to an IDGT instead of transferring them so they can minimize their gift tax liability.
  • Spousal lifetime access trusts (SLATs). SLATs are trusts set up for your spouse or other beneficiaries. The trustor spouse can fund the trust with assets to be held for the spouse. Once the trust expires, the non-donor spouse receives the assets plus any appreciation in value. One advantage is that the wealth transferred isn't counted toward either spouse's estate.
  • Charitable lead annuity trusts (CLATs). With a CLAT, you can make fixed payments to preferred charities over the term of the trust. Once the trust expires, the remaining assets are distributed to your beneficiaries. The amount passed to your beneficiaries depends on the growth of the assets.
  • Irrevocable life insurance trusts (ILITs). ILITs are trusts that hold life insurance policies. You can transfer the life insurance policy to the trust or have a life insurance policy opened in the name of the trust. With an ILIT, you can add more conditions around how the death benefit is used, compared to a life insurance policy outside of a trust.

Intrafamily loans

You can loan assets to family members in exchange for a promissory note. The interest payments received will be based on the Applicable Federal Rate. The AFR is typically lower than commercial interest rates, allowing you to loan money to your family under more favorable terms. If the assets appreciate significantly, this can be an effective way to transfer significant wealth.

Annual gifting

Nearly any asset, like money or stocks, can be given as a gift. Many donors choose to gift annually to take advantage of the annual gift tax exemption. In 2022, you can gift up to $16,000 per person without paying a gift tax. Giving toward 529 plans and accounts created under the Uniform Transfers to Minors Act (UTMAs) are examples of gifting.

  • 529 plans are investment accounts for qualified education expenses. Contribution limits vary by state. In addition, the contributions are considered gifts. You can even pre-pay up to 5 years worth of gifts.*
  • UTMAs are custodial accounts that an adult sets up and controls for a minor until the minor becomes an adult. Contributions to UTMAs are subject to the annual gift exclusion. The account must be turned over to the beneficiary once they reach the "custodial termination age" for that state. There is no stipulation on how the money is used, however it only can be used on behalf of the beneficiary.

The nuances of gift and estate taxes that accompany various wealth transfer strategies can be complex. It's wise to consult with a certified public accountant in partnership with your financial advisor to understand the most tax-efficient plan for your financial situation.

How to successfully pass wealth to your loved ones

Once you select the strategy you'd like to use, it's time to put pen to paper. However, keep in mind that passing on assets should be more than just pulling together a will and handing over your cash. It's important to also foster healthy relationships with your beneficiaries, build trust, and share your knowledge, goals and values. All of this coupled with a smart financial plan for your asset distribution will make for a truly successful wealth transfer.

Share your goals

When passing on your assets, it's important to think about what success looks like to you. How would you like to see your wealth affecting the lives of others? When you know the answer to this question, consider sharing it with your heirs. Passing on your aspirations is more likely to inspire the recipients of the wealth to continue to steward it well.

Ensure your beneficiaries also understand the values and purpose that have carried you through life. What are the social, economic and philanthropic values that guide you? How do you imagine these values carrying on after you're gone?

Similarly, get to know what's important to your beneficiaries. Have conversations about their interests and aspirations. What do they see as their mission in life? Is there an intersection with what matters to you?

Educate your beneficiaries

As you have conversations with your loved ones, you may become aware of areas where they need more financial experience. Whether it's diving into the intricacies of the family business or the ins and outs of certain investment types, it's worth making sure your beneficiaries get the education they need. Courses and other formal training, mentors and financial professionals can also help prepare them for their newfound financial responsibilities.

Form your team

Choosing, constructing and executing a successful wealth transfer plan well often requires the help of experts. You should have a financial advisor, an estate planning attorney and an accountant who can work in tandem. Together, this team can help you create a plan that suits your goals, assets and family structure. While Thrivent does not provide specific legal or tax advice, we can partner with you and your tax professional or attorney.

The right financial advisor can also help you review your plan periodically, offering advice on how to update it after significant life changes, such as a death in the family or the birth of a child.

Document your plan

You will want to work with your estate planning attorney to complete any necessary paperwork. An attorney will ensure your documents are legally valid and notarized. Keep all key wealth transfer documentation in a secure and central location—and make sure your beneficiaries know where these items are.

Common pitfalls of wealth transfer strategies

Every family has particular goals and challenges to address when figuring out the best way to pass along assets to the next generation. But in general, the most successful wealth transfer plans avoid these missteps:

  • Leaving estate planning to your loved ones. When you don't articulate how you want your wealth distributed, you're leaving that decision to your loved ones. If they disagree with each other, family infighting around who receives what often ends up in court, where court fees eat away at the value of your assets. Potentially even more damaging is the lasting impact this has on family relationships.
  • Transferring too much to one person. Being left with large amounts of wealth can be daunting, leaving beneficiaries feeling overwhelmed and unable to meet expectations. And if they disagree with any conditions of the wealth transfer—such as attending a certain college or working for the family business—they may outright rebel.
  • Underestimating the taxes on your estate. Once wealth is distributed, many beneficiaries are shocked by their tax bill. Though estate taxes are not always completely avoidable, the best wealth transfer strategies work to minimize this tax liability.
  • Failing to keep documents up to date. Changes to the family structure can create confusion if an estate plan isn't updated. The court may have to intervene and make decisions that should have been yours if information is mission or inconsistent.

The fact is, passing on wealth takes mindful thought and planning. Effectively executing a wealth transfer strategy is vital to protecting and, in many cases, prolonging your family's wealth and contribution to society. Connect with a Thrivent financial advisor today for help.

The bottom line

Wealth transfer strategies are a must if you want your family's wealth to last more than just one generation. But remember: Successful strategies pass on more than just assets. Connect with professionals to begin financial planning but also connect with the loved ones you plan to name as beneficiaries—because while passing on wealth is valuable, passing on the values that have gotten your family to this point is priceless.

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*A $75,000 gift is viewed as an accelerated gift over five years. Additional gifts to the same beneficiary by the contributor within five years may result in a federal gift-tax liability. If the contributor dies within the five year period, a prorated portion of the gift may be included in their taxable estate.
Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.