Wealth Management & Financial Planning

Wealth Management & Financial Planning

What To Consider When Transferring Assets

Investments have varying characteristics. The most essential issues are volatility, taxation, and liquidity.  Occasionally, assets have to be divided amongst children and spouses in the case of divorce. Picking and choosing assets to be exchanged or delivered to a recipient is an art form often disregarded in emotional moments. Picking a beneficiary or assigning accounts to others in the case of a divorce can alleviate financial headaches tomorrow.

Volatility refers to the fact that an asset like a stock, bond, or mutual fund can change value based on market conditions.   The value can rise or fall. Deciding on a date to value assets for division and distribution is paramount.

The tax ramifications are identifying an asset for how a withdrawal will be currently taxed and taxed in the future.  An IRA, for instance, will be taxed upon withdrawal.  A Roth 401(k) or IRA will not be taxed.  A brokerage account or trust account will endure taxation on recognized capital gains, dividends, and interest every year.  Understanding the tax bracket now and projecting in the future for the donor and the recipient optimizes the transfer.

Liquidity is important if money will be necessary for current income or large distributions. This is especially true in a divorce where one spouse’s income is projected to be higher than the other’s or when a new residence may be required.

The art form comes from netting out the total assets and current needs of the recipient and the donor after taxes. This is not perfect, as things do change.  A job may fall through; a market may decrease the current value of a portfolio, or the IRS can change the tax code.

One issue often missed in a divorce is the transfer of retirement funds.  The current retirement landscape has tax-deferred assets via defined contribution plans – 401(k)s, IRA’s, and 403(b)s – where a current value is declared, but the future tax rate is unknown. Knowing which asset to leave and which beneficiary is a great way to enhance the value of the transfer.

Remember that you can transfer an IRA or 401(k) value directly to a spouse in case of death or divorce. At death, no tax is required.  Assuming the beneficiary is the spouse, the asset merely changes ownership to their name. Spouses can also elect to use the asset as an inherited IRA if they are under the 59.5 threshold, thus avoiding the 10% penalty.

If the spouse needs current income, the tax-deferred assets may be best utilized by going directly to a liquid account that is fully taxable. The distribution from the retirement account will be taxed, but the 10% penalty imposed by the IRS is waived. If the money goes to an IRA first and then a withdrawal is made, a recipient under the age of 59.5 will face the 10% penalty.

The suggestion is to net out all the assets according to the current tax code for each recipient and then exchange assets that provide the most value to all concerned.  Transferring assets requires thoughtful planning, not emotional decision-making.  Financial Enhancement Group stands ready to help you avoid pitfalls when you are deciding how to transfer assets.

The Financial Enhancement Group is an SEC Registered Investment Advisor. Securities offered through World Equity Group, Inc. Member FINRA/SIPC. Advisory services can be provided by Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated.

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