5 Tax Efficient Wealth Transfer Strategies￼
Reduce the Future Tax Burden of Your Family
This video will give you five things to do to take over more control over how much tax you pay to the government. But there’s a little bit of time left before the benefits of the Tax Cuts and Jobs Act goes back to previous levels. We’re not certain how this 2025 sunset will impact family estate planning, but many people are taking advantage of some of the preferential treatments now. You don’t need to have a lot of money to benefit from some of these strategies.
There are a few benefits of the Tax Cuts and Jobs Act that are going to be scheduled to revert back to the 2017 levels. Things like…
- the high lifetime gift,
- the estate tax,
- generation-skipping tax exemptions
Remember, your money can really only go to three places. It’s either going to go to your family, causes you care about, or Uncle Sam. Most of our clients usually prefer two out of the three of those. Yes, paying taxes is fine and we’ll pay the fair share but we don’t necessarily have to tip Uncle Sam.
#1: Annual and Lifetime Exclusion Gifts
The first strategy to know about is the annual and lifetime exclusion gifts. If helping your children is important to you – this strategy can be useful whether you have a little or a lot of money. In 2022, the annual gift tax exclusion amount is $16,000 per beneficiary. So if you’re married, you can give $32,000 to your kids or really any beneficiary without having to file a gift tax return. But if you do go over, then it’s recommended that you do file one. So it’s recommended that you stay under $32,000.
If reducing your future estate tax is important to you, the IRS said that taking advantage of the annual exemption amount now is not going to be negatively impacted after the 2025 sunset when the Tax Cuts and Jobs Act levels are expected to go back down. So it seems like gifts made under the current exclusion amount should not be subject to future estate taxes (which is good).
#2: Education Funding
The next tax-efficient wealth transfer strategy is education funding. The IRS allows anyone to pay educational expenses as long as it goes directly to the institution, essentially removing assets from your estate without a tax impact. Some institutions allow you to prepay multiple years at once of the education expenses.
Another education funding vehicle is a 529 – an education savings plan which you could contribute up to the annual gift tax amount per year. Some of those 529s even allow you to take a tax deduction on your estate taxes. Each state is a little bit different when it comes to that, there are different sets of rules, so just be sure to talk to your tax person or financial professional before doing that.
#3 Paying for Medical Expenses
The third strategy is similar to education funding and that’s just paying for medical expenses. If you pay directly to the medical provider and if the expenses are not covered by insurance, it has the same impact as paying education expenses, but just for medical.
#4 Charitable Giving
Now, the next strategy that can be useful is if there are certain things happening in the world that break your heart. If you have a desire to help people in need, you can save money on taxes through charitable planning.
Charitable giving is especially beneficial if you have:
- investments that have appreciated and gone up in value over time,
- real estate
- business interest
Many people are using donor-advised funds that allow you to give a portion of something that’s illiquid to a donor-advised fund.
So let’s say you had 5% of a building that had appreciated value. You could essentially give 5% of that building (which is then sold and then converted into whatever investments you want). The day that you give the gift should give you the tax deduction or tax benefit that same year.
The same thing can happen with business interest. If you carve out a piece of the business that you choose and gift it, you can get that tax benefit. When that tax deduction and that appreciated asset (or piece of an appreciated asset) is gifted and sold within the donor-advised fund, that doesn’t cause a capital gain for you.
This is one way to not pay capital gains tax on part of your appreciated assets, but it’s a great way to fund your giving expenses in the future or what will be your giving expenses. Plus, you can do it now without impacting your cash flow. However, there are all sorts of rules around this. Again, this is a high-level, big picture view but it’s example of how other people are benefitting from this strategy.
A donor advised fund is like a charitable bank account where you get to control the outflows and where it goes, but you really don’t include this in your estate (your total estate). It’s technically out of your estate. So you get to control it and where it goes. You can either set it up on one-time payments or you can set it up on monthly recurring to charities that you care about.
Speak with your financial professional about specifics before implementing something like this. If you’re interested in learning more about what’s possible with your giving, click on the Charitable Planning Strategy session. It’s not a call to work together as we do with most of our clients, it’s strictly just to talk about your giving strategy and then to help you develop one if you don’t have one.
The next strategy is to think about various types of trusts that you have available to you right now. These trusts are sometimes used if you don’t want to give assets directly to beneficiaries at this present moment, but maybe at a later date.
Some trusts allow you to control the assets until the beneficiary reaches a certain age or requirement. One is called a Crummey Trust that allows the guarantor to determine really how long the assets should remain in the trust, which gives some control over which beneficiaries or when beneficiaries can take full ownership.
There are also Charitable Trusts that essentially allow a charitable gift into a trust and allows you to receive an income while you’re still alive. Then, when you pass away the remainder goes to the charity. This is another way people are sometimes using charitable planning when related to estate taxes and estate planning.
Overall, these five strategies give you some idea of how you might be able to lower future estate tax liability for you and your family.