Prepare for the Great Wealth Transfer. In this article, we will walk you through actionable steps you can take to establish your giving goals, organize your estate and more.
Key Takeaways:
- The Great Wealth Transfer represents an estimated $84 trillion transfer from Baby Boomers to younger generations and charitable organizations.
- Understanding your personal goals, getting organized, creating a plan and communicating with heirs is key to a smooth transfer of assets.
- Working with a trusted advisor will help ensure you accomplish your personal objectives.
The United States is in the early stages of a major wealth transfer.
As the Baby Boomer generation — Americans born between 1946 and 1964 — reaches the end of life, their assets will be passed to younger generations and charitable organizations. This transition is commonly referred to as “The Great Wealth Transfer.”
By 2045, an estimated $84 trillion will be on the move. As a point of comparison, this figure represents 2.5 times the total amount of U.S. national debt. With so much money changing hands, experts anticipate ripple effects throughout the economy.
The Great Wealth Transfer also represents a looming challenge for Americans. In this series, we’ll walk through practical steps you can take when giving or receiving wealth. We’ll also highlight the unique impact The Great Wealth Transfer is likely to have on women.
Let’s start with the topic of giving wealth. This article provides a helpful guide to achieve your financial and legacy goals, while avoiding unnecessary tax burdens and emotional hardships.
The Great Wealth Transfer involves up to $84 trillion changing hands by the year 2045.
1. Establishing Giving Goals
The first step in any successful wealth transfer is establishing goals. Financial and legacy goals provide a compass to guide your giving. They also, when communicated, help your loved ones better understand your wishes.
Common giving goals include:
● Family: Many Baby Boomers intend to pass wealth to their children or younger generations. You may want to ensure financial stability, fund future education, help with housing or provide a safety net in case of unexpected life events.
● Loved ones: Beyond direct family members, you may look to leave wealth or cherished items with partners or friends. Like family giving, this transfer often involves elements of relationship and legacy.
● Philanthropy: You may also look to support causes close to your heart. Gifting assets to philanthropic causes or organizations is a powerful way to leave a lasting impact on the world.
It is also important to balance end-of-life giving goals with lifestyle and retirement needs. Detailed financial planning will help make sure you retain funds to cover daily expenses, as well as future purchases or experiences.
A financial advisor can help you identify giving goals and balance them with your lifestyle and retirement needs.
2. Organizing Your Estate
With goals established, it's time to organize your assets. A strong estate plan can efficiently guide your assets to the right parties, help avoid confusion and emotional distress and reduce the potential estate tax burden for your wealth transfer.
Estate Planning and Documentation
Many estate plans start with a will. A will, combined with a revocable trust, serves as the document(s) of record for your estate wishes. The will provides essential information on how and where your assets should be distributed, appoints an executor to administer your estate and can also name a guardian for minor children. When drafting a will, be sure to follow the legal requirements of your state.
You may also look to establish a trust. Trusts outline additional details on how assets should be managed and distributed and allows you to appoint a trustee to administer the trust. Trusts may also help protect assets from creditors and avoid the need to involve the probate court upon death.
It’s advisable to work with an estate planning expert to make sure your estate planning documents cover all necessary information and are correctly constructed.
Lastly, it’s important to keep your estate planning documents updated. Estate planning is an ongoing process, and it’s essential to update documents any time you experience a life event, change in assets or shift in your priorities.
To learn more about essential estate planning documents, read Comerica’s guide.
Tax Planning and Mitigation
Understanding estate taxes is another important step in the planning process. In 2024, the amount which can pass free of estate, gift and generation-skipping transfer tax is $13.6 million, known as the Federal Estate Tax Exemption. Assets you own at the time of death in excess of the federal estate tax exemption amount may be subject to estate tax. Keep in mind that there are many other factors that effect the potential for estate tax, including marital deductions, charitable deductions, state level estate tax and more. It is important to include your tax advisor in any tax planning discussions.
If you anticipate your Taxable Estate to exceed the estate tax exemption amount, it may be valuable to work with an estate planning expert to identify tax mitigation strategies. In the next section, we’ll outline several common ones.
3. Planning Your Transfer
There are two primary benefits to planning your wealth transfer ahead of time. First, planning requires you to think through scenarios, communicate your wishes and make updates as needed. This ensures your wealth transfer aligns with your goals.
Second, planning can help you reduce the tax burden on your estate. In 2024, the current estate tax rate is 40%, and several states also apply an estate tax. By moving assets out of your Taxable Estate, you can reduce the overall amount that will be taxed.
Common tax mitigation strategies include:
Lifetime Giving
Giving funds to family and loved ones during your lifetime can be a helpful way to reduce estate taxes. As mentioned, the IRS provides a lifetime exemption, which includes lifetime and estate transfers. Additionally, they provide an annual gift tax exemption, which is $18,000 per person in 2024.
While lifetime giving refers to the total amount value of transfers you can make (by gift and/or at death) without estate tax liability it is also important to consider the impact of appreciable assets, such as stocks and real estate. By gifting these assets during your lifetime — at a lower value, before they appreciate — you can keep the growth out of your estate, which can help keep the taxable value of your estate from growing over time.
To learn more about lifetime giving, read Comerica’s guide.
Irrevocable Trusts
Transferring assets to irrevocable trusts is another way to reduce your taxable estate. A Qualified Personal Residence Trust (QPRT), for instance, can be used to transfer real estate to heirs. Additionally, a Spousal Lifetime Access Trust (SLAT) can allow you to transfer funds into a trust with your spouse as the beneficiary, removing assets from your estate.
Additional trusts, such as the Intentionally Defective Grantor Trust (IDGT), Grantor Retained Annuity Trust (GRAT) and Irrevocable Life Insurance Trust (ILIT) are also common vehicles for transferring assets.
Trust-based strategies are often complex and require the advice of legal and estate planning experts. Consult with a professional advisor to see if one of these trust structures is right for you.
Charitable Giving
Lastly, charitable giving is a strategic way to achieve legacy goals, leave a lasting impact and reduce your tax burden.
By donating to a qualified charitable organization, you can take advantage of a few tax-saving effects. First, you may be able to reduce your current income tax liability. In 2024, taxpayers who itemize their return can reduce up to 60% of their adjusted gross income with charitable cash contributions. Additional rules apply for non-cash contributions.
Second, charitable giving also works to reduce the overall amount of your taxable estate. To accomplish charitable goals, direct giving is the simplest route. But many donors also choose to leverage Donor Advised Funds, Private Foundations and Charitable Split-Interest Trusts.
Third, by donating appreciated assets, the capital gain generated when the asset is sold will not be realized by the donor, which means the donor will not have to pay capital gains tax. Combined with the potential for an income tax deduction, donating appreciated assets can be a powerful way to give to charity.
To learn more about charitable giving strategies, read Comerica’s guide.
If you plan to reduce your Taxable Estate, consider lifetime giving, trust formations and charitable contributions.
4. Communicating with Heirs
Finally, it’s essential to share your estate plan with heirs. While many Baby Boomers have the best of intentions with their wealth transfer, experts suggest a lack of communication is a common source of stress and uncertainty.
To avoid negative impacts, consider these four important steps:
1. Create space for open discussion. Often, the most important step is to make sure everyone is heard. By connecting with your family and loved ones, and taking steps to engage in an honest conversation, you can unearth questions and address concerns.
2. Establish a shared vision. The goal of your conversation should be a shared vision. This vision helps unify your heirs and create a sense of purpose and responsibility for your loved ones.
3. Educate your heirs. By planning early, you can free up time to provide your heirs with the knowledge and tools they need to manage their inheritance wisely. Share financial best practices, as well as logistical information on where and how to access assets.
4. Introduce trusted financial advisors. If you’re working with a trusted financial advisor, it can be helpful to make introductions early. Giving your heirs an opportunity to form a relationship with the advisor can provide continuity and support when your time comes.
For an example of what can go wrong when you fail to communicate with heirs, read Comerica’s series of articles on the popular HBO show, “Succession.”
Communication helps avoid unexpected outcomes, confusion and resentment.
Need Help Planning Your Wealth Transfer Strategy?
Work with the professionals at Comerica. Our experienced team of advisors can help you identify giving goals, structure your estate, mitigate taxes and plan for the future. Contact your Comerica Relationship Manager or contact Comerica Wealth Management to request to speak with a professional today.
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