Ready or not, this is the age of the biggest wealth transfer in history. Wealth transfer is your chance to pass on the material rewards of your life. According to some estimates, nearly $60 trillion of wealth will be passed from one generation to the next. Figuring out how to pass on your estate to another generation can be complicated. There is a general lack of preparedness to give and receive inheritances.

What is wealth transfer?

Wealth Transfer is the transfer of wealth from one generation to the next. Usually, it is the process of transferring assets from parents to children. Transferring wealth from one generation to another is part of a smart financial planning strategy. Wealth transfer can include but is not limited to life insurance, wills, trusts, or estate planning, in a tax-efficient manner.

When thinking about generational wealth transfer, most Americans want to rest assured that their wealth transfers to the people they choose at the lowest possible taxation rate. The goal of wealth transfer is to take the risk out of moving wealth down from generation to generation.

Wealth transfer and the federal tax exclusion

The federal tax exclusion allows you to transfer assets at death to people free of the estate tax. It is tied to the federal tax exclusion. And it is designed to stop you from avoiding all estate taxes by giving away all assets while you are living. Therefore, any part of the federal gift tax exclusion you take advantage of during your life will decrease the federal estate tax exclusion available at your death.

Wealth transfer myths

Myth #1 – Wealth transfer is a quick and simple process—quite the opposite. Generational wealth transfer is a process that takes years and even decades.

Myth #2 – Moving wealth from one generation is automatic. Successful wealth transfer requires careful planning and education. Without planning, the wealth one generation amasses is easily wasted by a younger generation. There is no wealth transfer without responsibilities.

Myth #3 – You are ready for wealth transfer. Generally, both sides of the wealth transfer are unprepared. There is no inheritance strategy in place to transfer wealth from one generation to the next. And those who inherited the money are unprepared to manage it.

Myth #4 – The process of wealth transfer should be avoided. If you want your children to develop financial literacy, you should discuss wealth transfer early and often. A successful wealth transfer is to educate the younger generation about money, investments, and assets. Unfortunately, many people never get past the planning phase of inheritance.

Wealth transfer planning

Effective wealth transfer begins with the basics. Who gets what? When does it happen? How they get it? It’s critical to have an answer to all of these questions in advance. We don’t want to think about getting sick of dying, so we often procrastinate on wealth transfer. Suppose you take wealth transfer seriously, your entire family benefits. It helps you because you can relax about inheritance, and it helps your children because they can plan.

What are your wealth transfer planning goals?

Wealth transfer planning is a process. Don’t think of the process with a beginning and an end. Form a clear idea about your wealth transfer planning goals.

What is included in wealth transfer?

As you start planning your wealth transfer, consider what is included in your estate.

Business interests:

  • Real estate investments or mobile home park investments
  • Farm or ranch
  • Ownership or part ownership in a business enterprise
  • Partnership interests

Financial assets:

  • Life insurance proceeds from policies
  • Bank accounts
  • IRA accounts
  • Qualified plan balances
  • Investments

Additional property and assets:

  • Your home
  • Second-home
  • Vacation property
  • Vehicles
  • Boats
  • Airplane
  • Art
  • Antiques
  • Collections
  • Personal belongings

Wealth transfer through gifting

You are allowed to do a tax-free wealth transfer to your spouse. The requirements for the tax-free wealth transfer is for your spouse to be a U.S. citizen, and the transfer must be completed during his or her lifetime or at death. Wealth transfer to a person who is not a U.S. citizen is more difficult. There is a limit to how much you can transfer per year. You should check with your tax professional about the current annual limit.

How much can a married couple gift tax-free?

Every year the IRS announces new tax credits and limits. For this year, the exempt amounts for gift and estate taxes are as listed below:

  • $11.58 million exempt per individual – Therefore, if a person passes away, she can transfer up to $11.58 million to beneficiaries tax-free.
  • $23.16 million exempt per married couple
  • $15,000 annual gift exclusion amount

Generation-skipping tax through wealth transfer

You can incur the generation-skipping tax when your grandparents transfer assets or money to you (grandchild). This happens when wealth transfer skips a generation. For example, generation-skipping tax occurs when grandparents transfer wealth to their grandchildren instead of their children. The generation-skipping tax also applies when transfers or gifts are made to other family members or unrelated persons who are at least 37 1/2 years younger than those who transfer the wealth. These beneficiaries are often called “skip persons.”

Skipping a generation is an intelligent wealth transfer because it offers a way to avoid inheritance tax. By skipping a generation, donors avoid double taxation. Instead of paying tax once when wealth is transferred from the grandparents to their children, and once again, when wealth is transferred from the children to the younger generation, one generation avoids paying inheritance tax.

What is the biggest transfer of wealth in history?

We are currently living through the biggest wealth transfer in history. This unprecedented wealth transfer is often referred to as the “Great Transfer.” It is estimated that about $30 trillion in financial and non-financial assets will be transferred in the United States. The biggest wealth transfer is expected to peak between 2013 and 2045. At the height of the biggest wealth transfer, about 10 percent of total wealth will transfer every five years.

Is wealth created or transferred?

New wealth is created every day, yet most of the wealth in the world is transferred. Wealth is transferred from generation to generation. When parents help their children with a downpayment on a house purchase, they transfer wealth. It is also wealth transfer when parents or grandparents pay for a child or grandchild’s college education.

Society transfers wealth from person to government in the form of taxes. Sometimes wealth is transferred through donations to uplift the less fortunate. The process of wealth transfer can be thought of as distribution.

How much wealth will millennials inherit?

According to some estimates, millennials will inherit more than $68 trillion. The wealth transfer from the baby boomer generation to millennials is the greatest wealth transfer in history. Unlike the millennial generation, baby boomers weren’t burdened with the high cost of education and real estate. Add the disastrous 2008 recession, and you understand why the millennial generation is better equipped to be the beneficiary of wealth transfer than the creator of wealth.

Due to wealth transfer, there will be a steady flow of millennials getting rich. Because the millennial generation is smaller than the baby boomer generation, the wealth handed down will be highly concentrated.

Can you transfer wealth too soon?

Once you transferred wealth, it’s gone. If you think your children will transfer it back to you in case you change your mind, you may or may not be surprised. Legally, they don’t have to return any asset to you after you have gifted it to them. And even if they would be open to transferring it back to you, if they sold or lost the assets, there isn’t anything they can do. Sometimes your child might transfer the asset back to you, but their spouse may object. Your children might divorce after wealth transfer, and the asset could have been split between your child and the ex-spouse. This kind of situation can really damage your family and your relationship with your children.

Additionally, there may be tax issues to deal with. When you give a person other than your spouse more than $15,000 in one year, a gift tax may be involved. And in case your children sell the asset, there is a possibility of capital gains tax. The reason for that is the asset would not receive a stepped-up basis like it would if the asset were inherited upon your death.

The value used to establish gain or loss for income tax purposes is the basis of an asset. In general, the basis is the amount you paid for an asset. Transferring an appreciated asset to your children while you live keeps your old basis (the amount you paid for it). But if they receive the asset in the form of inheritance following your death, it may receive a new stepped-up basis as of the date of your passing.

Here is an example. Let’s say Peter bought his house for $120,000, and today it’s worth $375,000. He gives it to his daughter Mary, who then sells it for $375,000. Because Peter transferred the title to Mary while he was alive, the house maintains Peter’s original cost basis of $120,000. Therefore Mary has a $255,000 gain on the sale and under current tax law. The result is that she has to pay capital gains tax. Check with a tax professional about the current capital gains tax rate. Depending on Mary’s filing status and other income, she may also have to pay an additional Net Investment Income Tax.

Now, let’s look at another wealth transfer option. Mary inherits the home after Peter dies. Unlike in the above example, the house was not gifted while Peter was living. Because the home was transferred as an inheritance instead of as a gift, it receives a new stepped-up basis to the current market value as of the date of Peter’s death, which is $375,000. So, if Mary sells the property for $375,000, there is no gain on the sale. Thus, there is no Net Investment Income Tax or capital gains tax to pay.

Keep in mind that substantial gifts may disqualify a person from receiving SSI (Supplemental Security Income) and Medicaid benefits for a period of time. The government imposes a five-year “look back” term when a person applies for Medicaid coverage. The goal is to limit people from “spending down” their assets in order to qualify for healthcare coverage. Instead of giving away assets, some people place the asset in a revocable trust to avoid the penalty.

If you want to reduce estate taxes, gifting can be a great option, particularly if you can afford to transfer an asset and if your estate is substantial. But it is a mistake to transfer wealth you may need later. Before wealth transfer, consult with an experienced estate attorney and tax professional.