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Navigating life events and wealth transfers

Date posted:  12/18/15 11:15:00 AM Individuals commonly transfer wealth to recipients in accordance with life events.

In the coming decades, Americans are expected to transfer $59 trillion of their wealth, according to a new report from the Center on Wealth and Philanthropy (CWP) at Boston College. With so much money changing hands, individuals should be aware of how life events can dictate wealth transfers and how to benefit from efficient tax strategies.

Major life events can trigger transfers in the form of gifts or establishing a trust. They also present an important time to re-evaluate estate planning documents like trusts and wills, and address potential beneficiary changes. When an individual determines beneficiaries and the details of his or her estate plan, it's important to notify the recipients so they can plan for transfer and tax logistics.

What to expect
High-net-worth individuals with significant assets are more likely to develop savings and investment plans specifically for their children. By contributing to accounts that facilitate tax-free growth or have adjustable target risk or target-date funds, parents can transfer a portion of their wealth immediately upon a child's birth. Whether it's a 529 education plan or a traditional indexed mutual fund, these accounts allow beneficiaries to access savings upon reaching adulthood.

"Benefactors and beneficiaries alike should approach their wealth with acute care."

However, sending a child to college is not the only life event that typically precipitates a wealth transfer. Marriage is also a common event for which individuals may consider distributing assets. Because newlyweds may not have a stockpile of cash reserves or large investments, a timely transfer from a benefactor can help cover the costs of the ceremony and reception, fund a honeymoon or start a nest egg.

In some cases, wealth transfers are an appropriate tool to alleviate a beneficiary's financial stress, whether from high medical expenses, loss of assets or a family emergency. When an individual requires additional funds to protect against financial downfalls or to mitigate costly expenses, such as caring for a loved one or living with a disability, a wealth transfer can be a means of either reactive or proactive money management.

Most large wealth transfers happen upon the death of an individual. While the CWP report found individuals are donating a larger percentage of their financial assets to charities -- which requires its own type of management strategy -- trillions will still be passed on to family members in the future.

Though life events do not always require or predicate a wealth transfer, oftentimes they are accompanied by one another.

Appropriate tax strategies
Smaller transfers can be made to avoid taxation. For example, an individual can make a tax-free annual gift of $14,000 or less to an individual, or $28,000 or less to a married couple during the 2015 tax year. The maximum number is indexed each year and announced by the IRS. Additionally, payments made directly to a qualified provider in the name of another's education or health care can be exempt up to a larger amount.

Transferring financial assets can be a complex legal process.Transferring financial assets can be a complex legal process.

Wills can allow individual retirement accounts, life insurance, Social Security benefits and other retirement assets to pass to beneficiaries tax-free. Living trusts, such as irrevocable and life insurance trusts, can protect assets from probate and provide the backbone for recipients' estate planning goals as well.

The rules and regulations surrounding taxed and untaxed transfers can be vast, and donors and recipients should speak with an attorney, tax professional and their wealth advisor to learn about and take advantage of optimal strategies.

Making the transition
There are many wealth transfer strategies to capitalize on, and benefactors and beneficiaries alike should approach their wealth with acute care, as options should be tailored to specific needs.

In fact, data from The Williams Group indicated 70 percent of all wealth transfers fail, according to Forbes contributor Carolyn Rosenblatt. Failure in this sense means beneficiaries did not see as much money as they could have had the transfer avoided probate.

The primary reason for this poor execution was that recipients were not aware of the obligations they incurred once wealth was transferred and did not understand how to maximize their new-found wealth post-transition.

With accurate knowledge as well as legal and tax guidance, assets can be appropriately transferred at the right time with financial confidence and savvy.