Lifetime asset transfers play a vital role in estate and legacy planning, helping you achieve three key goals:
Freeze your gross estate by removing future appreciation, effectively transferring growth from senior family members to the next generation.
Reduce your overall tax liability by shifting the tax burden on income generated by the asset to the recipient.
Reduce your taxable estate further if the transfer involves paying capital gains taxes on the asset, such as in the case of a sale.
Failing to understand and utilize available transfer strategies could cost your family dearly. Without proper planning, your estate’s growth could result in excessive taxes, unnecessary complications, and even disputes among heirs.
In this post, I’ll give you a quick overview of the different types of lifetime asset transfers that can help achieve these goals and more. To keep things clear and concise, I’ll explore each method’s unique estate and tax benefits in future videos. Make sure to subscribe to our newsletter so you don’t miss out!
Arm’s-Length Transactions
These transfers usually have no impact on the transferor’s gross estate and take place between unrelated parties who act independently, ensuring the deal is fair and for full market value.
Sales
For example, if you sell an asset outright—be it property, a business, or an investment—the transaction removes that asset from your estate and avoids triggering gift taxes. The sale of an asset is particularly appealing for individuals who have already used up their lifetime gift exemption. It’s also a smart way to transfer assets with high appreciation potential to younger family members, ensuring future growth occurs outside your taxable estate.
Installment Sales
Installment sales take this concept a step further by allowing the buyer to pay the seller purchase price over a set period, with interest. This can work beautifully if you want to manage your income stream or avoid pushing yourself into a higher tax bracket in any given year. However, it’s important to note that any outstanding principal on the installment note, along with any accrued interest, will be included in the seller’s gross estate if they pass away before the note is fully paid off.
Exchanges
Another option is an exchange, where individuals trade assets of equal fair market value. For example, someone might swap a rapidly appreciating artwork for a collectible of comparable value but with slower appreciating potential. As long as the values are equal and properly appraised, these transfers avoid gift taxes and ensure fairness.
Gifts
Outright Gifts
One of the most straightforward ways to transfer wealth is through gifts. An outright gift might be as simple as handing over a sum of cash or transferring ownership of a stock portfolio to a loved one. It’s an uncomplicated approach, but there are limits to consider.
For 2024, you can gift up to $18,000 per person annually without eating into your lifetime gift tax exemption. This amount might seem small, but over time, it adds up. For instance, a couple could gift $36,000 annually to each of their children or grandchildren, significantly reducing the size of their taxable estate over years.
Gifts Through Trusts
If outright gifts feel too hands-off, consider using trusts. Gifting assets into a trust allows you to control how and when the recipient accesses those assets. For example, if you’re worried about a young adult squandering an inheritance, a trust can stagger distributions or set conditions, such as graduating college, before funds are released.
Trusts also offer creditor protection, ensuring that the gift remains intact for your loved ones even in the face of lawsuits or divorce.
Transfers for Fair Value
If you’d rather keep assets within your family while avoiding outright gifts, private annuities and self-canceling installment notes, or SCINs, may be worth exploring.
Private Annuities
A private annuity works like this: you transfer an asset to a loved one, typically a family member, and in exchange, they pay you a fixed amount for the rest of your life. This approach is especially beneficial if the asset is expected to appreciate significantly, as future growth is removed from your estate. And here’s the cool part: if you pass away sooner than expected, the payments stop, and your heirs get to keep the appreciation without any extra costs.
Self-Canceling Installment Notes
SCINs function similarly but add another layer of flexibility. With a SCIN, the obligation to continue payments is canceled if you pass away before the loan is paid in full. This feature can make SCINs particularly attractive for families with business interests or valuable assets, though they come with risks and require proper structuring to withstand IRS scrutiny. Both methods are usually used when a transferor is in poor health and offer smart ways to manage wealth transfer while ensuring you’re fairly compensated during your lifetime.
Retained Interest Gifts
Grantor Retained Trusts
If you’re not quite ready to fully part with an asset, retained interest gifts might be the perfect middle ground. Take Grantor Retained Trusts, for example. These irrevocable trusts are often used to transfer assets between family members at a reduced gift tax value. For instance, with a Grantor Retained Annuity Trust, you place an appreciating asset into the trust, retain a stream of income for a set period, and transfer any remaining value to your heirs tax-free. Different types of Grantor Retained Trusts are available, and they are particularly effective for assets likely to appreciate, such as stocks or a family-owned business.
Intentionally Defective Grantor Trust
Another effective retained interest tool is the Intentionally Defective Grantor Trust (IDGT). Despite the name, this trust is carefully crafted to remove assets from your taxable estate while allowing the grantor to pay income taxes on the trust’s earnings. This keeps the trust’s assets intact and growing tax-free for your beneficiaries. A common strategy involves selling appreciating assets to the IDGT in exchange for a promissory note. This freezes the asset’s value for tax purposes and ensures future growth benefits your heirs. IDGTs work particularly well for high-growth assets like family businesses or real estate, offering control and long-term tax efficiency.
Qualified Personal Residence Trusts
Qualified Personal Residence Trusts operate similarly but are specifically designed for your home. You transfer the property into the trust, retain the right to live in it for a certain number of years, and then it passes to your heirs. By doing this, you remove the home’s future appreciation from your estate while still enjoying it during your lifetime.
Bargain Sales
A bargain sale is a hybrid approach that combines selling and gifting. You sell an asset to a family member or loved one for less than its full market value, effectively making the difference between the sale price and the asset’s value a gift. The discount from the fair market value is typically limited to the seller’s annual gift exclusion.
For example, if you sell a property worth $50,000 to your child for $32,000, the $18,000 discount is treated as a gift. But because this amount matches the annual gift exclusion for 2024, no gift tax is triggered.
Bargain sales are particularly useful for passing on appreciating assets while ensuring the recipient benefits from a lower cost basis. It’s a flexible way to balance your financial needs with strategic wealth transfer.
The Power of Family Limited Partnerships
Here’s where estate planning gets creative: family limited partnerships, or FLPs. With an FLP, you transfer ownership of an asset—say, a family business or a property—into a partnership structure. You retain control by holding the general partnership interest, while transferring limited partnership interests to your heirs. Why is this important? Limited partnership shares are often valued at less than their proportional share of the asset because the recipient lacks control or easy marketability. This allows you to transfer more value using less of your gift tax exemption or lifetime estate tax exclusion.
For example, let’s say you own a $1 million property. By placing it in an FLP and gifting a minority interest, the value of the gift might be reduced to $700,000 due to valuation discounts. That’s $300,000 of estate value removed without using additional tax exemptions.
While FLPs are frequently challenged by the IRS and require meticulous planning and a good legal team, they’re a tried-and-true strategy for families looking to transfer wealth efficiently.
Non-Taxable Wealth Transfers Strategies
Qualified Transfers
Not all transfers come with tax implications. Some are entirely non-taxable, offering excellent opportunities to support loved ones without triggering the IRS. For instance, paying tuition or medical expenses directly to a provider isn’t considered a gift. This means you can help a grandchild attend college or cover a loved one’s hospital bills without touching your gift tax exemption.
Unlimited Marital Deduction
Transfers to a spouse benefit from the unlimited marital deduction, allowing you to move as much wealth as you like without tax consequences. This strategy can be particularly powerful in equalizing estates between spouses to optimize future tax planning.
Annual Exclusion Gifts
And let’s not forget annual exclusion gifts. With the limit set at $18,000 per person in 2024 and increasing to $19,000 in 2025, you can systematically reduce your estate over time, avoiding unnecessary complications later.
Even payments related to support, divorce settlements, or certain business transactions can be structured in ways that avoid tax entirely. The key is to know these rules exist and to use them intentionally as part of your broader plan.
Final Thoughts
Lifetime transfers are about more than just saving on taxes—they’re about taking control of your legacy. Whether you’re making outright gifts, leveraging advanced strategies like FLPs, or balancing retained interest gifts, there’s no one-size-fits-all approach. What’s important is starting now, because delaying these decisions can lead to lost opportunities and higher costs down the road.
As I mentioned, in my future posts, I’ll break down each of these methods in more detail so you can see exactly how they work and decide which ones might fit into your plan. For now, take the first step and start thinking about how you want your wealth to serve your loved ones - and your legacy - today.
If you are looking for tax-efficient ways to transfer wealth to your heirs and charitable causes, feel free to schedule a complimentary Estate Clarity meeting to see which strategy could work for your unique needs.
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