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Wealth Planning

Transferring wealth to family: When is the best time for you?


 

If you want to pass wealth on to your children and grandchildren, it’s wise to contemplate when it might be best to make that gift. Should you transfer wealth during your lifetime—or after? 

Many people find compelling reasons to avoid giving away wealth during their lives. They think that transferring substantial portions could mean:

  • They might not have enough to maintain their lifestyles
  • Their beneficiaries might not use the wealth wisely, or at least in a way they’d want it used
  • Wealth might end up outside the family because of a child’s divorce or other misfortune

These concerns are legitimate.

But it probably makes the most economic sense for you to give at least some portion during your lifetime—irrevocably—if:

  • Your goal is to preserve family wealth

  • You are a U.S. taxpayer with wealth that exceeds the amount that can be handed down free of U.S. transfer taxes (in 2022 that “lifetime gift tax exclusion amount” is $12.06 million per individual and $24.12 million for a married couple) 

Indeed, gifting during life can help you transfer more wealth and take greater control of your legacy, both because it is tax-efficient and because it lets you strategically allocate investments and see the impact of your gifts (and if need be, to course-correct).

That said, actually deciding to give away your assets can be difficult. Here, we provide a framework to help you arrive at your best decisions about how much to give—and when.

 

Thinking through the wealth-transfer dilemma  

We recommend looking through two lenses when deciding whether how much, and when, you might give to your beneficiaries. Ask yourself two questions: 

  1. Quantitative: Can I afford to give away substantial amounts during my lifetime?

    To find your answer requires a robust analysis of your balance sheet and cash flows, not only today, but also for the rest of your life. It also requires honestly assessing what you want to spend now and for the rest of your years. 

    Unless your answer is an unequivocally clear “yes,” you probably should continue accumulating wealth and revisit this question later. 

  2. Qualitative: If you can afford to give away substantial amounts during your lifetime, ask yourself: Would it be wise?

    Of course, answering this question is more complicated. 

    Presumably, you’d give assets hoping to make your recipient’s life better in some way (for instance, helping pay for education, medical bills, travel, a wedding, house or business startup).  So it’s important to know that it makes little difference—economically speaking—whether that transfer of assets is made outright to a beneficiary or into a trust for the benefit of that beneficiary.

    The key difference between gifting outright versus putting wealth in trust is how much control you’d retain over determining how that transferred wealth might be used. If you give outright, your recipient can generally do whatever you could do with that wealth. But if assets are gifted into a trust for the benefit of the beneficiary, the terms of the trust you put into place, and the trustee you select, would control how the assets are invested and distributed. 

    Either way, you might consider giving in small chunks while you are living so that you are able to monitor how the recipient uses amounts received. Then you’d be there to guide them, sharing the values as well as the assets you want to pass on. You’d also be around to see potential problems and try to nip them in the bud.

    For instance, if you think a child is spending your initial gift imprudently, you might help safeguard future gifts by putting those assets into a trust, or by requiring the recipient to first get coaching in financial management or other counseling. Or you could just leave assets to other beneficiaries.   

Best moves economically and from an investing perspective

Economically speaking, giving wealth away sooner rather than later is usually the best way to preserve family wealth across generations. The reason is simple: Any growth that occurs after a gift would belong to your heirs and not be subject to the 40% U.S. estate tax.

Further, if you earmark certain holdings for your children or grandchildren, you can be more tactical about how you invest those assets. For example, you might consider more aggressive allocations if there is a longer time horizon and lower (or no) cash flow distributions required. This strategy can amplify the efficiency of gifting during life, allowing those assets to potentially grow more over time, free from transfer taxes. 

Factoring in down markets

As it happens, now might be a particularly good time to gift certain assets. That’s because, in down markets such as the first half of 2022, giving away “beaten up” assets provides an opportunity to be even more tax-effective. (You can give away more assets while eating away less of your lifetime gift exclusion amount.)

It’s also important to revisit your quantitative analysis during market downturns. Will you still have enough assets remaining after the gift to support your lifestyle? The future growth prospects of the asset to be gifted is also a key consideration.

 

We can help

To be sure, the economics of giving are at their best (during your lifetime) when the psychology of giving may be at its worst (you might have several decades of life still ahead of you).

But this dynamic only underscores how important it is for you to explore both the quantitative (can I afford to?) and qualitative (is it wise?) sides of all your potential gifts. 

Your J.P. Morgan team can help you explore these questions, and find the answers that might best suit you and your family.

 

IMPORTANT INFORMATION

Investment trends may not materialize. Sustainable Investing and investment return are not always aligned, and may lose value.


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