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Wealth Transfer Planning: A Complete Step-by-Step Guide and Checklist

September 24, 2024

8 min Read

Written by Heather Taylor

Edited by Emily Gadd

Senior couple planning their investments with financial advisor in living room.

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Uncomfortable as it may be to discuss death with family members, especially parents, it’s still an important conversation to have when it involves transferring wealth.

Rather than wait until the worst has happened, families should start having these important conversations now. If you aren’t used to talking about finances or values with your family, here are some tips. Stacy Coffey, CFP and SVP wealth strategies at Wealth Enhancement Group, recommends asking questions with positive intent such as:

What type of legacy do you hope to build and leave for the family?
How can we make sure the values of our family pass to the next generations and live long after we’re not here?
How do we work together to uphold commitments you’ve made, or want to make, to causes and people important to you?

Parents and heirs should ask questions, listen carefully and approach the conversation with curiosity. As family members start to become comfortable with the discussion, Coffey said this leads to aligning on needs to accomplish outlined goals. Some of these needs may include:

Estate planning
Reviewing beneficiaries
Education planning

Meet Face to Face With All Professional Advisors

It is all too common for someone to experience the death of a loved and be left without a plan or a will that articulates the wishes of the deceased.

Christopher Manske, founder and president of Manske Wealth Management, recommends taking a face-to-face meeting with all professional advisors involved in the process. This usually means visiting the estate attorney’s office so the entire family can:

Learn about their loved one’s vision for their assets
Understand what is expected of the beneficiary
Shake hands with the financial advisor, CPA and attorney

Methods of Wealth Transfer

When it comes to transferring assets to heirs, there are a number of options available. This is one of the many reasons why consulting with financial professionals throughout the process is so important. But you should also have your own at least basic understanding of the types of wealth transfer vehicles at your disposal. Here are the most important, in no particular order.

Individually Named Beneficiaries

Some assets can pass to beneficiaries directly, without the need to be included in other estate planning documents or via probate. This is actually one of the best ways to transfer wealth directly to heirs without overly complicating the issue. As the experts at Western & Southern Financial Group explain, completing beneficiary designations saves your heirs:

Time
Money
Stress

Beneficiary designations allow you to completely avoid probate on those assets and give your money directly to those that you specify. They remove any ambiguity about your intentions for your funds after your death and allow your money to be transferred quickly. These designations are available for:

Retirement accounts
Life insurance policies
Many bank accounts

Trusts

Trusts are legal contracts designed primarily to facilitate the transfer and management of assets. They can be a bit more complicated than other types of estate planning documents. If you’re creating one, it pays to work with an attorney or other estate planning expert.

Trusts essentially transfer assets into a legal structure that holds assets for others. The two main types of trusts are revocable and irrevocable.

Revocable trusts

As Estate Planning and Trust Administration Specialist James L. Cunningham of Cunningham Legal explains, “A revocable trust is a trust that you can revoke, you can amend, you can change.” Revocable trusts allow the creators, also known as grantors, to control the assets in the trust, choose beneficiaries and even revoke the trust itself, as the name suggests. A living trust is a common type of revocable trust.

Irrevocable trusts

Irrevocable trusts, as the name suggests, cannot be changed or amended. They completely move assets out of the estate of the grantor and cannot be modified after their creation and funding. These types of trusts are generally used as an advanced tax planning strategy. This is because they remove the assets from a grantor’s taxable estate, typically reducing the amount of estate taxes that must be paid upon death. There are many types of irrevocable trusts, each fulfilling a specific estate planning need.

Gifts

Gifts allow you to legally pass assets to your beneficiaries while you are still alive. However, there are limitations on how much you can gift without having to pay a tax. According to the IRS, “the general rule is that any gift is a taxable gift.” This rule is partly designed to prevent benefactors from dispersing their entire estates while they’re still alive to avoid taxation upon death. While you are not technically limited to gifting any amount of money to anyone you want, your gifts must fall under the annual gift tax limit if you want to avoid taxes.

Annual Exclusion

For 2024, the annual exclusion per donee is $18,000. This means that if you have 10 children, for example, you can give away $18,000 to each of them, for a total of $180,000, and still avoid any gift tax.

Unified Credit

There’s another way to exceed the annual limitation, but it shouldn’t be done without the help of an estate planning expert. The IRS also grants a lifetime “unified credit” of $13,610,000 as of 2024. Any gifts you make above the annual exemption amount can still be tax-free if you claim the unified credit as a shield. Just be aware that this will reduce the ultimate exemption available to your taxable estate at death, and it must be tracked closely.

Gifting can be a great way to reduce the value of your taxable estate and shrink the potential tax bill you leave your heirs when you pass away. According to Oak Street Funding, federal estate taxes can reach 40%, and 17 individual states have their own taxes on the value of estates and inheritances. This can make taxes a significant burden for some individuals and families.

Loans

One creative way to transfer wealth to your heirs is to use an intrafamily loan. To legally loan money to your family, you’re required to charge them the applicable federal interest rate, or AFR. However, this rate is typically much lower than is available from commercial sources in the open market. For example, the long-term AFR is just 4.52%. If you can loan money to your family at a relatively low rate and they can use that money to invest in appreciating assets, such as real estate or even the stock market. It can be a clever way to generate wealth for them by using your own money.

Wills

This is one of the simplest steps anyone can take if they are preparing to transfer wealth. According to a Gallup poll, less than half of American adults have a will.

In the years to come, the lack of a will causes confusion and havoc for many families. Derek Jacques, attorney at The Mitten Law Firm, recommends setting up a trust to handle all assets. Those setting up an estate plan or a will need to determine how it will be accessed and by whom. If you are unable to fully prepare a will, document where assets should be disbursed upon death.

Not sure what to do next, even if you know you need to prepare a will or estate plan? Coffey recommends taking a moment to pause and take care of yourself.

“Estate plans and probate aren’t executed overnight. You have some time,” said Coffey, adding that families who don’t already have a financial advisor in place may want to consider one.

Common Pitfalls in Wealth Transfer

Estate planning can be a legal and regulatory nightmare. This is why it’s critical to work with estate planning attorneys and financial experts to ensure that you avoid the most common pitfalls in wealth transfer, including the following:

Failing to specifically name beneficiaries
Failing to update estate planning documents or beneficiary designations, particularly in the event of divorce and remarriage
Improper use of annual gift tax exclusion and/or unified credit
Selecting the wrong type of trust
Choosing the wrong executor for your estate
Favoring certain beneficiaries over others, creating tension and even legal problems for your heirs after your death
Errors in drafting your will or trust
Overlooking a needed estate planning document, such as a will, trust, or healthcare directive
Providing lump sum distributions to spendthrift heirs

These are just a few of the most common estate planning and wealth transfer mistakes. Many more landmines exist that you are likely unaware of, so it’s imperative you work with experts in the field.

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John Csiszar contributed to the reporting of this article.

Information is accurate as of Sept. 24, 2024.