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Financial Wellness

The Great Wealth Transfer—Are You Ready?

Baby Boomers are expected to pass on over $84 trillion to their heirs through the year 2045, in what's being referred to as the "Great Wealth Transfer." The Baby Boomer generation, born between the years 1946 and 1964, has accumulated more wealth than any other generation and own about half of America's wealth. Aptly named, the Great Wealth Transfer will be the greatest generational wealth transfer in history. Experts project that younger generations like Gen X and millennials will inherit $72 trillion of that total, while charities receive the rest.

As they say, you can't take it with you

The old saying "You can't take it with you," literally applies under state and federal law when you die. Everything that you have accumulated during your life must transfer to someone else after you're gone.

Because of this, a will is an essential part of any wealth transfer plan. And wills are not just for the rich. A will helps guarantee that your assets—which can be your bank account, your prized book collection, your car, your home, antiques passed down from family, basically anything and everything you own—end up in the right hands.

The perils of dying without a will

It is essential that you create a will when you're alive and of sound mind, so your wealth transfers to whom you want it to. If you die without a will, your estate will be distributed according to your state's intestate succession laws. These laws may be quite different than your wishes and could result in unintended beneficiaries receiving your hard-earned money.

In Maryland, for example, the state takes responsibility for making a will for you if you die without one, and the probate court will determine who inherits your estate, a process called intestate distribution. Assets can be tied up in probate court for months, even years, leaving your loved ones with a stressful and costly situation to deal with as they are already grieving your loss.

Beyond the will

While a will is a good place to start, experts say it may not be enough to handle your finances well when you're gone. Financial advisors recommend having a more comprehensive wealth transfer strategy, in part due to the tax implications involved in transferring assets.

Below are four of the most common wealth transfer strategies. Each strategy has its pros and cons, so it's best to consult with a financial advisor to discuss which strategy is best for you.

Irrevocable Life Insurance Trusts. Life insurance is a popular wealth transfer asset because the proceeds are inherited estate and income tax free. It can also be used to provide liquidity to pay for estate taxes, or for transferring wealth directly to your beneficiaries. Irrevocable Life Insurance Trusts help to remove the value of the death benefit from the owner's taxable estate.

Pros: The removal of the death benefit from your taxable estate can mean that your total estate taxes will likely be lower. Additionally, death benefit proceeds pass according to the terms of the trust, as opposed to paid out in one lump sum.

Cons: Since the trust is irrevocable, the life insurance policy cannot be easily removed from the trust. And, if you transfer your life insurance policy into the trust and pass away within three years of the transfer, the policy may be added back in to the estate.

Intentionally Defective Grantor Trust. An Intentionally Defective Grantor Trust is an irrevocable trust considered "defective" for income tax purposes. Basically, you can continue paying the income tax owed on the trust assets, while at the same time having the value of those assets removed from your taxable estate.

Pros: This option provides a way to remove future growth from your taxable estate. The IRS allows you to pay income taxes on the funds generated within the trust, which helps preserve your assets while reducing the overall value of your taxable estate.

Cons: The trust is irrevocable and assets transferring in do not receive a step up in basis. Before choosing this option, it's recommended that you consult with your accountant so there are no unintended income tax consequences.

Grantor Retained Annuity Trust. A Grantor Retained Annuity Trust is a good option if you have an asset that will likely appreciate over time, but either you don't wish to transfer a large asset or you do not have any federal exemptions left. The goal of this trust is to remove the appreciation of the asset from your estate, while receiving annuity payments back to you for a period of time.

Pros: Any growth that occurs within the trust from the day it's funded to the day it's terminated is passed on to your beneficiaries estate tax free. This option takes out the growth from your estate, while also providing you with an annuity payment on an annual basis. It's a lower-risk strategy, and can be effective if you have rapidly growing assets.

Cons: For estate tax purposes, if you die during the trust term, legally it's seen as if the trust doesn't exist. So the value of the assets included in the trust are also now included in your taxable estate. This option can also be expensive due to the ongoing asset valuations often required.

Spousal Lifetime Access Trust. A Spousal Lifetime Access Trust is similar to the Intentionally Defective Grantor Trust, however, the main difference is the primary beneficiary is your spouse. This option makes the most sense if you are married, and also if you feel you may need to access the trust assets before you die.

Pros: Along with the offering the same benefits of the Intentionally Defective Grantor Trust, this trust provides your spouse the ability to withdraw assets from the trust if/when needed.

Cons: This trust is irrevocable, so if your spouse passes away first, or if you divorce, you will lose access to the trust. Also, IRS rules prohibit spouses from creating identical Spousal Lifetime Access Trusts for one another. It is important to consult with an attorney who is experienced in this type of trust.

Wealth transfer mistakes to avoid

Once your wealth transfer plan is in place, be sure to avoid these common pitfalls that can create problems for your loved ones both while you're alive and after you're gone.

Not including non-financial assets in your plan. Money is often the focus of wealth transfer, or large assets like a house, but also be sure to include non-monetary collections in your plan as well. For example, your personal collections, inherited items you wish to keep in the family, and items with sentimental value.

Lack of communication. Talking about death is never easy, but it's important that you talk to your spouse and family about your intentions. Let them know that you have a plan in place and how it's generally structured (i.e., direct inheritance, trust, etc.). You don't need to share all of the details, like who gets what and how much, but talking about the main parts of your plan can help avoid miscommunication and confusion. Plus, it gives your heirs an opportunity to ask any questions they may have. This is especially important if you assign one of your beneficiaries a specific role, such as a trustee or executor. He or she will need to know about the designation and what it involves.

Letting your plan collect dust. A wealth transfer plan is not a one and done endeavor; it should be revisited ever few years or after major life events like a new grandchild, death of a spouse, new marriage, sale of a home, or retirement. Work with your financial advisor to review your plan to make sure you are still passing your assets to the people who will carry through the wishes set forth in your documents. As your beneficiaries age, it's also good to assess whether the roles you've assigned to them are still the best choice for you and for them.

In a nutshell: Figuring out how best to transfer your wealth can be difficult, as there are a lot of moving parts and things to consider, including eliminating or reducing estate taxes and aligning your plan with your own personal situation and goals. Don't go it alone. Consult with an experienced financial advisor so you can have confidence knowing the assets you spent a lifetime working for will end up in good hands.


Are you ready for the Great Wealth Transfer? Meet with a Tower Wealth Management Wealth Advisor to come up with a plan. Schedule your complimentary, no-obligation consultation today.

Resources: CNBC, Tower Wealth Management, Fidelity, 1834 Wealth Management Services, Investopedia, Bankrate, JD Katz Attorneys at Law

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