Tax Savings Strategies for Intra-Family Wealth Transfers

How to transfer wealth without paying taxes? An eye-catching, promising, yet misleading question. However, there are time-tested ways to offload part of the burden. This article provides actionable insights to be examined by capital founders.

KEY TAKEAWAYS

Remarkably, high-net-worth individuals with $5-30 million in assets represent an 87% share of all those transferring wealth to succeeding generations.

At first glance, it presents a mouth-watering chance for the potential beneficiaries. However, they rarely think of the bruising effects of the tax regulations at this stage. Without early engagement and preparation, they could face mandatory tax payments of up to 40%.

Globalized citizens are the most vulnerable to these risks. Generally, their business transactions span multiple jurisdictions. This subjects them to more complex laws.

What multi-pronged strategies could safeguard holdings and relatives?

Preventable and inevitable financial consequences

The primary goal is to avoid a trade-off between the family's future and the influence of taxation. Planning ahead will reduce unnecessary perils.

Jurisdictions offer exemptions. For example, this refers to lifetime estate tax. The exact amount is a condition of specific countries' regulations. In some of them, it is equivalent to more than $13 million worth of assets for tax-free transfer.

What If you are to hand over possessions valued at more than the abovementioned sum? The applicable levy rate may reach as far as 40%. Debts, mortgages, or property maintenance costs can be kept out of this payment.

What if it’s simply a transfer from one spouse to another? This qualifies for a tax-free option as well. However, the subsequent step, when transferring assets to children, unavoidably implies fiscal obligations.

Exploring capabilities of special legal formations

U/HNWIs frequently create dedicated legal structures. They transfer ownership of their assets to these entities. Irrevocable and revocable trusts are the most common options. If so, the founders act as the grantors of these organizations.

How does this assist in arranging family wealth transfers in a tax-effective manner? For instance, it lowers your taxable estate level. The entire value of the funds held in trust is not included in this assessment.

The same applies to all earnings of the trust. As a rule of thumb, they are subject to the legal entity taxation and not the donor.

What is the reverse side of the coin? The grantor has no power to alter or shut down the trust. Once it has been set, the donor has no right to reclaim assets and capital from it. However, this issue is relevant only for irrevocable trusts.

Is it a problem for you? If so, consider other entities like revocable trusts. They enable the grantor to take back the funds, chattels, and other valuables.

Philanthropy and other types of giving

Is gifting a simpler and more straightforward tactic? To some extent, it is. However, there are policies for it likewise.

The typical approach is to opt for an annual gift tax exclusion. In some countries, the range varies from $15 000 to $18 000 per person annually. All capital worth up to this rate can be gifted on a tax-free basis. Regulators typically adjust the rate for yearly inflation levels.

What if the worth of the money, properties, collectibles, or other assets exceeds this grade? If the total worth of these assets is below the rate applicable to a lifetime exemption, they can be classified as non-taxable.

Notably, contributions made to charities or spouses are also non-taxable. The same goes for healthcare and educational institutions donations. If these gifts are to other beneficiaries than the donor, they may qualify for tax-free status.

What is FLP?

Another tax-effective method is forming a family limited partnership (FLP). Under the FLP, family members serve as general or limited partners. They take responsibility for controlling assets and investments.

This legal structure targets gift and estate tax liabilities. However, legislative frameworks imply that the FLP must be an income-generating organization. Consequently, all involved in its operations are obliged to report any profits obtained through it.

What is the generational wealth transfer?

This term refers to the unraveling process of passing on fortunes from capital founders to their families. It is estimated that $31 trillion will be allocated to the next generation by 2033.

According to Owner.One’s research, this category accounts for up to 75% of all losses that occur during intra-family handovers.

What is the most tax-efficient strategy?

Unfortunately, there is no silver bullet. This process largely depends on tax regulations applicable to the wealth owner’s countries of residence, business activities, or asset location.

What is the best legal structure to minimize tax burden?

Again, there's no one-size-fits-all solution. In general, the main idea is to differentiate tax liability. For example, if income is generated by the trust, the donor of the trust is not subject to taxation.

What qualifies for tax-free options?

In particular, gifts to spouses or charities. This is also true for direct contributions to healthcare and educational institutions.

CONCLUSION

Undoubtedly, wealth transfer planning is a formidable duty. It challenges heads of families to distribute their fortunes fairly. The concealed task is to make certain that hard-won assets will last across generations.

Part of the job is to align wealth transfer strategies with tax regulations in advance.

The other mission is to make sure that your wealth data is in transfer-ready mode. On average, $340 000 per $1 000 000 is lost due to the unpreparedness of capital founders and their families.

Owner.One is the only comprehensive digital infrastructure addressing these challenges. You may try it out now and see for yourself.

Disclaimer

The provided content is intended for informational purposes only and should not be construed as investment or tax advice. We advise all readers to conduct their own research before making any investment or tax decisions.

While Owner.One endeavors to keep the information up-to-date and correct, we make no representations or warranties, express or implied, regarding the completeness, accuracy, reliability, suitability, or availability of the information for any purpose. Any reliance you place on such information is strictly at your own risk.