Wealth Transfer: Making Sure What You Built Goes Where You Want It To Go

Building wealth takes a lifetime.

For many people, it starts with a first paycheck, a retirement account, a home and years of disciplined saving. For business owners, it may also include a company that took decades of work to build.

Eventually, the question changes.

It is no longer simply:

“How do I grow my wealth?”

It becomes:

“What happens to everything I've built when I'm no longer here?”

That's the foundation of wealth transfer planning.

Wealth Transfer Is About More Than an Estate Plan

When people hear "estate planning," they often think about a will.

A will is important, but wealth transfer is much broader.

It involves determining how assets will move from one generation to another, who receives them, when they receive them and how efficiently that transfer can occur.

That can involve retirement accounts, investment accounts, real estate, business interests, life insurance, trusts and other assets.

The goal isn't simply to leave something behind.

It's to make sure what you leave behind actually accomplishes what you intended.

Who Gets What?

This sounds like a simple question.

It often isn't.

A family may have a vacation property that one child wants to keep and another wants to sell.

A business may be worth millions but only one child may actually work in it.

A retiree may want to leave money to children while also providing for a surviving spouse.

Another person may want to leave a portion of their wealth to grandchildren or charitable organizations.

Without planning, these competing interests can create conflict.

Good wealth transfer planning starts with understanding the owner's intentions.

Who should receive the assets?

When should they receive them?

Should everyone receive the same thing, or should everyone receive the same economic value?

Those are very different questions.

Equal Isn't Always Fair

Consider a business owner with two children.

One child has worked in the family business for 20 years.

The other has pursued an entirely different career.

The business is worth $5 million.

The owner wants the child who works in the business to eventually own it, but also wants to treat the other child fairly.

Simply splitting the business 50/50 may not make sense.

The children could end up owning a company together despite having completely different interests.

A better solution may involve transferring the business to the child who operates it while using other assets or insurance to create additional liquidity for the other child.

That's an example of estate equalization.

The objective isn't necessarily to give everyone the exact same asset.

It's to create an outcome that reflects the owner's intentions.

Liquidity Matters

One of the biggest problems in wealth transfer is that many valuable assets aren't liquid.

A business isn't cash.

A farm isn't cash.

Commercial real estate isn't cash.

A vacation property isn't cash.

Yet these assets may represent a substantial portion of someone's net worth.

If an estate has obligations that require liquidity, heirs may be forced to sell assets simply because they don't have enough cash available.

And forced sales aren't always made under favorable circumstances.

This is where liquidity planning becomes important.

Life Insurance and Wealth Transfer

Life insurance can play a unique role in wealth transfer because it can create liquidity specifically at death.

For example, a family may have substantial wealth tied up in a business.

Instead of selling the business to create liquidity for heirs, life insurance may potentially provide a separate pool of assets for estate or legacy purposes.

Similarly, a life insurance strategy can potentially be used to equalize inheritances between children.

The key isn't simply owning a life insurance policy.

The important question is:

What financial problem is the policy solving?

Business Owners Have a Different Problem

Business owners often have an especially complicated wealth transfer challenge.

Their business may be their largest asset.

It may also be their largest source of income.

They may want to retire from it while keeping it within the family.

They may want to sell it to employees.

Or they may want to transition ownership to a partner.

The business cannot necessarily be divided like a brokerage account.

A succession strategy needs to address ownership, valuation, liquidity, taxes and the interests of the family and the business.

Wealth transfer planning and business succession planning therefore often go hand in hand.

Don't Ignore Retirement Accounts

Retirement accounts also require careful attention.

Traditional IRAs, 401(k)s and other qualified accounts have their own distribution and beneficiary rules.

The tax consequences for heirs can be very different depending on the type of account they inherit and their relationship to the original owner.

Beneficiary designations also matter.

An outdated beneficiary designation can potentially override what someone believes their estate plan says.

That's why beneficiary designations should be reviewed as part of the overall wealth transfer process.

Taxes Are Part of the Equation

Nobody knows exactly what future tax laws will look like.

That's one of the reasons wealth transfer planning shouldn't be built around assuming today's rules will remain unchanged forever.

Federal estate and gift tax rules, income tax rules and state-specific laws can all affect how wealth moves between generations.

The objective isn't necessarily to eliminate every tax.

It's to understand the potential tax exposure and coordinate the available strategies with qualified tax and legal professionals.

Start Before You Need the Plan

One of the biggest mistakes people make is waiting until they are very old before addressing wealth transfer.

Planning earlier provides more options.

Business owners may have more opportunities to structure a succession.

Insurance may be easier to obtain while someone is younger and healthier.

Assets can potentially be repositioned over time.

Family members can be brought into the conversation.

And perhaps most importantly, decisions can be made while the person who built the wealth is still able to clearly communicate their wishes.

Wealth Transfer Is About Control

Ultimately, wealth transfer planning is about maintaining control over something you spent your entire life building.

You worked for it.

You saved it.

You invested it.

You built the business.

You accumulated the property.

You created the wealth.

The objective is to make sure that when it eventually passes to the next generation, it doesn't simply go wherever the circumstances of the moment happen to take it.

Good wealth transfer planning allows you to decide where your wealth goes, who receives it, and how it gets there.

Because building wealth is only one part of the job.

Preserving it and transferring it according to your wishes is the final piece of the puzzle.

This article is for educational purposes only and does not constitute individualized financial, investment, insurance, tax or legal advice. Wealth transfer and estate planning strategies are highly fact-specific and may involve significant tax and legal considerations. Consult qualified legal, tax and financial professionals regarding your individual circumstances.