Proper Path to Integrated Wealth Management, Pt. 3: 3 Key Wealth Transfer Strategies

Alternatively, Section 529 college savings plans can also be funded using annual exclusion gifts; a special tax law provision allowing a donor to pre-fund up to five annual exclusion gifts to a 529 plan account in a single tax year can be a simple, yet very effective, use of the annual exclusion. Each annual exclusion gift removes those assets from the taxable estate of the donor and saves as much as 55% of the value of the gift (including post-gift appreciation or earnings on the gift) from future estate taxes. 

The MDT can assist the HNW client in carrying out an effective annual exclusion gifting plan in the following ways: 

• The investment advisory professionals on the MDT complete account forms, obtain signatures and file paperwork to set up trust accounts or 529 plan accounts for junior family member recipients of gifts. These professionals on the team can also facilitate transfers of cash, securities or other assets from the senior generation to these recipient accounts. 

• As new junior family members are born or adopted, the MDT can repeat the process of setting up accounts and ensuring that maximum use of annual exclusions is employed.

• Care should be taken to track pre-funded annual exclusion gifts to 529 plan accounts so that unintended duplicate annual gifts to the same recipients are not made. Annual gifting can be commenced again for beneficiaries of 529 plan accounts once the five year pre-funding has been amortized over the four years following the year of the pre-funded gift. 

• Calendar ticker systems should be maintained by the team to ensure that annual exclusion gifts are made timely each year and that they are cataloged to be reported on each annual gift tax filing of the senior generation members. 

Key Transfer Strategy 2: Family Limited Partnerships

Family limited partnerships (FLPs) are a commonly used estate planning tool to transfer wealth in the form of non-marketable limited partnership (LP) interests to junior family members (or trusts.) FLPs are attractive because valuation discounts applicable to gifts of LP interests allow “leveraging” of gift exemptions, while still affording control over the FLP assets to be exercised by the senior generation through retention of general partner interests. The MDT can assist with FLPs in the following ways: 

• Investment advisory professionals select assets in the portfolio best suited for funding of the FLP, set up custody accounts, and implement transfers of assets into the FLP accounts.

• Tax/accounting professionals obtain tax identification numbers for the FLP and calendar estimated tax payment dates and amounts, then coordinate cash flow needs for tax payments. 

• Income tax professionals prepare and file annual income tax returns for the FLP, issue Forms K-1 to the partners and, if engaged to do so, prepare tax returns for the individual partners. 

• Large lifetime gifts of LP interests in an FLP can be made from the senior generation to junior family members (or trusts) to leverage the use of the lifetime exemptions. The MDT can assist with obtaining appraisals, documenting transfers and preparing and filing gift tax returns to report these transfers. 

• Annual gifts of LP interests from the senior generation can be coordinated by the MDT by first obtaining appraisals of interests constituting the annual exclusion amount, assisting with the preparation and execution of transfer documents for the senior generation to complete the gift transfers and preparing and filing gift tax returns to report the transfers.  Gifts made at the end of a calendar year can be coupled with similar gifts made at the beginning of the next calendar year using the same appraisal minimizes appraisal costs by requiring one appraisal every other year rather than annually. 

Key Transfer Strategy 3: Intrafamily Loans

Wealthy families often make loans among themselves for various purposes. The senior generation might loan funds to children, grandchildren and trusts for the benefit of family members to purchase homes, enter into businesses or simply to make investments. An MDT can assist with loan transactions in the following ways to assure IRS compliance, avoid potential problems and enhance the wealth-shifting effectiveness of such loans.  

• Opportunities to shift wealth by structuring low interest rate intrafamily loans can be overseen by the team.    

• Documenting loans with promissory notes and maintaining tickler files of interest rates, payment due dates and note maturities should be a regular item on the client advisory team’s agenda. 

• Opportunities to refinance higher rate notes at lower rates should be a regular review item for the MDT when prevailing minimum intrafamily “applicable federal rates” decline. 

• Regular reviews among the tax, investment advisory, bookkeeping, accounting and estate planning personnel on the MDT will assure that interest is properly paid or accrued and correctly reported on family members’ tax returns and that any necessary gift tax returns are prepared and filed, particularly in the case where gifts might be made by the senior generation through debt forgiveness. 

In conclusion, an integrated approach to estate planning and wealth management, employing a multidisciplinary team, can help HNW clients realize their wealth transfer goals early enough in their lifetimes to enjoy their wealth, pursue philanthropic goals and leave a larger charitable legacy at death. 

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For more on how to advise your HNW clients what not to do, we invite you to watch this Bloomberg TV video featuring Mr. Cody.—Ed.

To view all three articles in this series, please view our Proper Path to Integrated Wealth Management homepage.