Stableford Capital Insights

Transferring Wealth to Beneficiaries Tax Efficiently

The primary focus of estate planning is transferring wealth to beneficiaries as efficiently as possible. For many planning their legacies, this includes passing on businesses and assets, and it is of utmost importance to make sure their families benefit as much as possible while assets remain intact. To that end, reducing the estate tax is a critical element of your planning.

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Transferring Wealth: How and Why

Estate tax can consume half of the estate. After working to build a business all your life, the thought of forking over half of this in taxes alone is maddening, particularly when you consider your beneficiaries.There are many ways of transferring wealth to the next generation. One simple, commonly used method is to begin gifting cash to beneficiaries now. If gifts are $15,000 or less per year, these are not subject to the gift tax. However, depending on the size of the estate, this may not be the most efficient method.When it comes to passing on a business, estate planning may necessitate thinking outside of the box. Using trusts and annuities, it is possible to restructure your business so that you still benefit from it in retirement while passing it on to your beneficiaries without subjecting them to consuming taxes.

Assurances and Insurance

The transfer of business assets focuses on keeping ownership, shares, and value within the company.One way to do so is Key Person Insurance. A company can take insurance out on the life of an owner or key executive. Through this insurance, the beneficiary - the company itself - receives benefits directly, should that key person pass away.The financial coverage offered by key person insurance allows the company to remain afloat while any damage is dealt with. Payouts can be used as a stopgap to solve problems caused by the unexpected absence.

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Benefiting the business more significantly, however, is the ability for the insured’s partnership or shares to be purchased back to remaining shareholders. This ensures that shares stay within the company.Another way businesses can be assured of smooth ownership transitions in the event of a partner’s exit from the company (or death) is through buy/sell agreements. Partners enter into these agreements to dictate the terms of purchase of the exiting partner’s shares.Whether stipulated by key person insurance or a buy/sell agreement, it is important to plan ahead regarding how the shares of a business should be distributed. This avoids financial consequences and legal uncertainties for beneficiaries.

Reducing Estate Tax Via Restructuring

There is more to smoothing the transfer of business assets than simply dictating terms. To get the most out of business transfers, avoiding heavy taxation should be a goal.Approaching estate planning with the intent to get the most out of transferring wealth to the next generation keeps plans focused on avoiding the estate tax. To work most efficiently, these steps involve long-term planning and should be started under the advisement of a financial planner as soon as possible.Utilizing a tax specialist to restructure your business using a trust like a SuperGRAT will allow you to benefit from the profits of your business in retirement and also pass them on without being subject to the estate tax. The trust permits you access to income, but the term-limited irrevocable trust can eventually be passed on to beneficiaries.

How Does a SuperGrat Work?

The SuperGRAT is a grantor retained annuity trust. Using a GRAT will require structuring your business into shares and taking on the value of shares you wish to gain income from. For a set amount of years, you will earn income from the shares you hold. A financial advisor will assist you by putting these into an irrevocable trust. Once the set time is up, you can take back the trusts or they can be given to loved ones.

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Timing of these is often set up so that the trust is passed on to beneficiaries after the owner no longer needs the income, either due to advanced age or because he or she expects to have passed away by the end of the set term.The shares in the trust are not part of the estate, and thus not subject to an estate tax or probate decision. They are also not cash, therefore not subject to the gift taxSuperGRATs make it possible to seamlessly pass wealth from one generation to the other in a time frame that makes sense for everyone.Planning for your business exit, retirement and family can seem overwhelming. Do the best thing for yourself and your beneficiaries by getting advice from experienced financial advisors who can help with your transfer of business assets.Avoiding the bulk of estate taxes is possible with the right guidance; learn more by reaching out to Stableford Capital at (480) 493-2300 or schedule a complimentary 15-minute consult. In just 15 minutes, we'll get a sense of your situation, goals, and needs – and explain how we aim to provide peace of mind as we help you grow and protect your legacy.

Nikki Sutcliffe
Nikki Sutcliffe is Stableford Capital’s Director of Advisory Services. Prior to joining Stableford, Nikki worked at Charles Schwab for five years where she was an investment advisor and most recently as a financial planner. She started her career as a portfolio manager at Girard Partners and worked there for seven years while helping to grow the firm. Nikki graduated from Penn State University with a B.S. in Finance and earned her CERTIFIED FINANCIAL PLANNER™ designation in 2013.