If you are a parent, you already know it’s important to plan for your children in case something happens to you. One way to do this is by transferring assets to them before you die and in your estate planning. This can be done in a number of ways, and each has its benefits. In this blog post, we will discuss the different options available to you and how each can help protect your children’s future.
Remember: Generational Wealth building isn’t just for parents: grandparents, aunties, and uncles can change the shape of the entire next generation.
Work with A Family Law Attorney and a Tax Planner
There are many different ways to transfer assets to your children, and almost all of them require a lawyer and have tax implications. It is important to consult with an attorney as well as a tax planner, both to choose the transfer structure that is right for you and also to ensure that the documents are compliant with Federal and State property and tax law.
Draw Up a Will
One way to transfer assets to your children before death is through a will. A will is a legal document that outlines how you would like your assets to be distributed after you die. A will doesn’t actually transfer ownership of your assets until after you die, but it can be used to specify exactly who should receive what.
If you have a will, it is important to keep it up-to-date as your life and circumstances change. You should also review it regularly with a family law attorney to make sure it still meets your needs.
One important note: a will is great for establishing your wishes for the distribution of your assets are followed, but it will not keep your estate out of probate. Probate is the legal process of distributing a person’s assets after they die, via the courts in your state. It can be time-consuming and expensive, if you have substantial or complex assets, so many people choose a trust.
Create and Move Assets Into A Trust
A trust is an arrangement in which one person (the trustee) holds and manages property for another person (the beneficiary). It’s a critical part of estate planning. Transferring assets into a trust can help avoid probate because the trustee can distribute the assets according to your wishes without having to go through the court system.
Moving assets into a trust that can be managed by a trustee will give your children access to the assets when they reach a certain age while ensuring that the assets are managed responsibly.
One common type of trust is a living trust, which is created during your lifetime. You can name yourself the trustee, which gives you control over the assets during your lifetime. Then, when you die, the trust remains in force and the beneficiary can receive the assets without having to go through probate. You can even trigger the execution of your trust before you pass away.
This is a good option if you want to maintain control over the assets during your lifetime, but also want to avoid probate.
Name Beneficiaries on Financial Accounts and Insurance Policies
Most financial accounts and life insurance policies allow you to name a beneficiary. This means that the account or policy will be transferred to the named beneficiary upon your death, without having to go through probate. Having updated beneficiaries is the cheapest and easiest way to transfer assets such as retirement accounts, bank accounts, and life insurance policies.
It is important to review your beneficiaries regularly and update them as needed, especially after major life events such as marriage, divorce, birth, or death. This can be especially important for single parents and blended families.
Transfer Assets During Your Lifetime
Another way to transfer assets to your children before death is through a gift or by selling the asset to them for less than its fair market value.
The upside of this option is that you are still around to help them manage the asset. The downside is that lifetime transfers have serious tax implications that vary depending on the value of the asset and your state’s laws.
Gift Assets to Your Children
You can give $16,000 per year, per child (or any other recipient) without needing to file any tax forms or pay any tax. If you are married, you and your spouse can each give $16,000, for a total of $30,000 per child. More importantly, the current (2022) Federal gift tax lifetime limit is $12.06 million per person, and you can also double it if married. While it would require you to file a form, gifts of any size can be given to your children without owing any gift tax, as long as the total amount gifted during your lifetime does not exceed the $12.06 million limit.
Sell Assets to Your Children for Less Than Their Fair Market Value
You can also sell assets to your children for less than their fair market value. This is The most advanced move, absolutely requires a competent lawyer and tax planner, and is generally most appropriate for family businesses. Generally, this involves a contract in which you sell the asset to your children for an agreed-upon price that is less than the fair market value.
There are a few different ways to transfer assets to your children before death. The most common ways are through a trust, naming beneficiaries on financial accounts and insurance policies, or transferring the assets during your lifetime.
Each method has its benefits and drawbacks, so it is important to discuss your options with a family law attorney and tax professional to choose the option that best suits your family.
Claire Hunsaker, ChFC®, is a Chartered Financial Consultant featured in American Express, Forbes, Parents, Real Simple, and Insider. She offers free financial planning for single women through AskFlossie, where she is CEO. Claire holds an MBA from Stanford and is an IRS-certified Tax Preparer. She has 20 years of business and leadership experience and approaches money topics with real talk and real humor.