Families of all shapes and sizes need to develop a plan to transfer assets since the transfer of wealth to the next generation is inevitable. Preparing your heirs to take over your estate and educating them on your directives is equally important. The involvement of a financial planner has become more important than ever. In addition, tax and legal professionals can all add significant value and help with the wealth transfer process.
How to be tax efficient?
There are many ways to reduce and potentially avoid capital gains tax when the transfer of wealth is underway. However, please remember that capital gains tax is currently the cheapest tax you will ever pay. Here are several ideas that help you pass along assets:
1. Annual Gifting of $15,000 or $30,000 for spouses splitting gifts per done for the year 2022.
2. Direct payments to medical care or educational expenses can be an effective gifting strategy that avoids taxes.
3. South Carolina is a non-community property state which means spouses can pass assets to one another to get 100% stepped up coast basis if titled correctly.
4. Educate spouses and heirs to enforce your wishes and a smart Estate Plan.
What is Probate and how does it affect me?
Probate is relatively simple and inexpensive process in the state of South Carolina. It is the legal procedure or court supervised proceeding that authenticates your will and executor. All of your assets must be uncovered and after taxes and debts are paid, your estate can then be distributed. This process takes normally less than 12 months but the bigger the estate, the lengthier the process can be. There are several ways to avoid probate:
• Items that pass by Beneficiary – This would be a life insurance policy or an IRA where proceeds go directly to the beneficiary without going through probate.
• Items that pass by Trust- The Trust owns what is inside and dictates where the assets will go by naming a beneficiary.
• Items that pass by POD (Payable on Death) and TOD (Transfer on Death)- These are bank accounts or investment accounts that bypass probate to directly pay your beneficiary.
• Items that pass JTWROS (Joint Tenants with Rights of Survivorship)- These assets will automatically pass to the survivor. We see this frequently in home ownership and investment accounts.
Note *Items titled in a Tenancy by the Entirety are not subject to Probate but can only held by spouses and not available in the State of South Carolina.
What about creating a Trust?
The creating of a trust has many redeeming qualities. If you are ok with spending some money on the front end, it can be a very effective and private tool. When you create a trust, you are basically changing ownership of the asset from your name to the trust. There are three main parts to a trust:
• Trustor or Grantor- This is the person who creates and places assets in the Trust.
• Trustee- This is the person who makes all of the decisions for the beneficiary and holds legal title.
• Beneficiary- This is the person who is designated to receives the assets (usually spelled out in the trust document).
Each state has specific rules when it comes to trusts so consulting an estate attorney is a must when completing your estate plan.
What about Estate Tax?
There is no estate tax levied on any estate less than $12,060,000 for the year 2022. However, that number will be repealed to $5,000,000 in 2025 and there has been widespread speculation that the current administration could significantly lower the estate tax exemption. All of this being said, life insurance can be a good asset that can be used to pay estate taxes. Policies can be placed in a trust that will be used to pay estate taxes at death. For example, a Second to Die Life Insurance Policy purchase by an ILIT (Irrevocable Life Insurance Trust) could be a smart way to take a large insurance policy out of the estate by changing the ownership from the individual to the trust. These proceeds could then be used to pay estate taxes so that assets could then pass to the next generation.
What do I do?
Each client’s situation is unique and there are many ways to prepare for transferring your wealth. All of our advisors here at Greenwood Capital would be glad to sit down and go over any questions you may have. Please contact us so we can assist you with any of your estate needs or to make sure your assets are going to the right place.
William M. Coxe Jr., Private Client Advisor – In his role as a Private Client Advisor, William provides personalized client service to high net worth individuals, corporations, endowments, and foundations. He works one-on-one with his clients on financial and estate planning, asset allocation, and assisting his clients’ understanding of the capital markets.
The information contained within has been obtained from sources believed to be reliable but cannot be guaranteed for accuracy. The opinions expressed are subject to change from time to time and do not constitute a recommendation to purchase or sell any security nor to engage in any particular investment strategy. Investment Advisory Services are offered through Greenwood Capital Associates, LLC, an SEC-registered investment advisor.
