Creating a wealth transfer plan

Building a strong financial foundation is a significant achievement that can benefit not just you, but also your family for many years to come. While it can be tough to imagine a time when you won’t be here to lend a hand, having a plan for passing on wealth can bring comfort and financial security to future generations and help loved ones thrive long after you’re gone.

What is a wealth transfer?

Wealth transfer is when money or assets are handed down from one person to another, oftentimes following someone’s passing. According to financial experts, there is currently a “Great Wealth Transfer” going on in the U.S., where in the next twenty years, older generations are passing down $84.4 trillion in assets, with $72.6 trillion in cash, investments, homes and other valuables going directly to their heirs. This trend could potentially change how money is used and invested in the future, as younger people receive this wealth and make their own financial choices.

To help strengthen a personal estate plan so your wishes may be honored, it’s important to develop a thoughtful wealth transfer strategy. Proactively creating this plan can help minimize family confusion and disagreements, reduce taxes on an estate, and offer financial support to loved ones after you’re gone.

What is the difference between a wealth transfer plan and an estate plan?

An estate plan involves laying out how assets will be managed and distributed after a person’s death, and a wealth transfer plan is an additional step that focuses on the specific strategies for passing that wealth, keeping tax implications and timing in mind.

Transferring wealth before death

Transferring wealth often involves careful planning regarding personal circumstances, tax consequences, and family relationships. When deciding whether to transfer assets to beneficiaries while you’re still alive, there are benefits to consider:

• Control: Conditions can be set on how assets are used or managed, such as establishing trusts for children or beneficiaries.
• Flexibility: Gifts can be adjusted based on personal circumstances and the changing needs of their heirs. Allows a strategy to be adjusted if needed along the way.
• Tax advantages: By gifting assets before their value appreciates significantly, it may be possible to reduce the taxable estate and leverage the annual exclusion.

The federal estate tax exemption for 2024 is $13.61 million (double for married couples). This means a person can transfer this amount tax-free during their lifetime or at death. Amounts exceeding this threshold may be subject to estate taxes.

Transferring wealth after death

In some cases, it may be wise to wait until after a person's passing to transfer wealth. If there are unresolved family dynamics or uncertainties about how heirs will handle assets, waiting can also prevent premature transfers that could lead to disputes or mismanagement. Proactive planning is important and allows you to iron out the details ahead of time to help streamline the process for loved ones and ensure they are financially prepared if the unexpected happens.

Deciding whether to transfer wealth during one’s lifetime or after death depends on individual financial goals, the needs of heirs, and the types of assets involved. Regularly reassessing a wealth transfer plan can help ensure it remains aligned with these changing priorities.

Including life insurance and annuities in wealth transfer planning

Adding life insurance or an annuity to a wealth transfer plan can help support a smooth, tax-free transition of assets and provide financial security to an individual’s heirs.

Using life insurance as part of a wealth transfer plan can offer several benefits, including:

• Liquidity for estate: Life insurance can help cover debts or estate taxes, helping ensure that other assets can be preserved for heirs.
• Generally tax-free death benefit: Life insurance payouts to beneficiaries are generally tax-free, providing heirs with a significant financial resource without tax liabilities.
• Estate equalization: It can be used to balance inheritances among heirs, especially if certain assets (like a family business) are not easily divisible.

Benefits of using an annuity as part of a wealth transfer plan include:

• Tax-deferred growth: The money in an annuity grows tax-deferred, meaning taxes are not owed on earnings until funds are withdrawn.
• Customization options: Annuities can be tailored to fit specific needs, such as lifetime payments or fixed terms, which can be beneficial for planning.
• Guaranteed income: Annuities can provide a steady income stream for beneficiaries, which can be especially valuable in retirement.

If annuities or life insurance are included in a wealth transfer strategy, it’s important to review and update beneficiary designations regularly so they are still in line with current wishes. Discuss personal intentions with heirs to avoid confusion and choose a trusted executor of the estate to manage assets responsibly and according to your preferences. If there are any life changes, like marriage, divorce, or birth of a child, make sure beneficiaries are updated to reflect these changes.

Steps for preparing for a wealth transfer

To begin creating a wealth transfer plan, there are some proactive steps you can take to help get personal finances in order. Here are five actions to help prepare for transferring wealth:

1. Define goals: Determine the desired outcomes for wealth transfer, such as providing for family members, funding education, supporting charitable causes, or ensuring financial security for a spouse. Decide whether to transfer assets during one's lifetime or wait until after passing, based on financial and family dynamics.
2. Evaluate financial situation: Create a thorough list of bank accounts, real estate, personal property, investments, and retirement accounts, including their estimated values. Document any debts or financial obligations that could impact the estate, such as mortgages, loans, or credit card debts.
3. Collect financial documents: Put together tax returns, insurance policies, investment statements, and property deeds. Organize them in a secure, easily accessible location. Outline key information, such as account numbers, contact information for financial institutions, and login in details for any digital assets.
4. Create an estate plan: Work with an estate planning attorney to create necessary documents, including a will, trusts, and powers of attorney, clearly outlining wishes about transferring assets. Ensure beneficiary designations on accounts, annuities, and insurance policies align with the estate plan, regularly reviewing and updating as needed. 5. Discuss the plan: Have open conversations with family members about the wealth transfer plan where they can share their thoughts and ask questions. Discussing personal intentions can help prevent misunderstandings and conflicts in the future.

Planning for a wealth transfer is a forward-thinking approach that can greatly benefit everyone involved. Consulting with a financial professional, estate planner, or tax specialist can help you evaluate your finances, clarify objectives, understand the process, and make informed choices about asset transfer.

Neither North American nor its agents give legal or tax advice. Please consult with and rely on a qualified legal or tax advisor before entering into or paying additional premiums with respect to such arrangements.

The term financial professional is not intended to imply engagement in an advisory business in which compensation is not related to sales. Financial professionals that are insurance licensed will be paid a commission on the sale of an insurance product.

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