By Sean Gerlin, CFP®, ChFC®, CLU®
Have you ever thought about the legacy you will leave? While your legacy can mean many things, in the financial planning world, this refers to the assets and wealth you will transfer to the next generation. It may be a noble goal to want to leave a gift that spans generations, but estate planning and gifting comes with its own set of challenges. For example, your estate may be protected now, but will that continue once in your heirs’ possession?
The process of gifting may be complex, but there are ways to simplify the transition of wealth to the next generation. Here are some steps you can take to ensure you leave a legacy you can be proud of.
Make Direct Payments
Simply making direct payments for your children or grandchildren’s expenses is one of the easiest ways to transfer your wealth without the hassle of taxes. Many institutions will allow you to pay your grandchildren’s tuition directly from your account. You can also conveniently take care of other important expenses, such as medical expenses, by automating payments to their healthcare provider.
When you make this sort of payment to an organization or institution, it helps you bypass the burden of gift tax, which can be a hefty price to pay on your assets. However, if you gift the money directly to the recipient, you might still be subject to gift taxes.
Give Annual Gifts
You could also decide to gift some of your assets to your loved ones. Giving gifts helps you reduce the taxed portion of your estate, and you can gift up to $16,000 (1) per year to a loved one before any gift taxes are incurred. If you are splitting the gift with your spouse, you can give up to $32,000 combined. To effectively transfer wealth to the next generation, you can ensure that you give the maximum amount every year.
It’s worth noting that once you gift more than $16,000 (or $32,000 if gift-splitting), the excess amount spills into the “lifetime exclusion bucket.” You must use this entire amount before the IRS requires you to pay gift tax. For 2022, the current lifetime exclusion is $12.06 million for individuals and $24.12 million for couples. (2) You will be required to file a gift tax form for any amounts that exceed the annual gifting limits of $16,000 individually or $32,000 jointly. This is how the IRS will track your lifetime exclusion amount.
Another great way to transfer wealth to your children and grandchildren is through the use of 529 college savings plans. There is a special provision that allows donors to contribute 5 years’ worth of gifts as a lump sum. This means an individual can gift up to $75,000 and a married couple could gift up to $150,000, without incurring gift taxes! (3) The beneficiary can then withdraw the funds and the investment growth, tax-free to pay for qualified education expenses.
Creating a trust is another way to transfer wealth to the next generation. To oversee the use of your assets, you can create a trust with specific guidelines for passing your wealth to beneficiaries.
When your estate is significant, an irrevocable trust comes in quite handy. You transfer all your assets from your estate to your trust, thereby bypassing estate tax. Additionally, when you accrue income on the assets you hold in your trust, you are not personally responsible for paying taxes since the trust is considered a separate entity. As such, the trust will be taxed directly on any retained income and beneficiaries will be taxed on any distributions of income. This is an effective wealth transfer strategy since beneficiaries are typically in lower tax brackets.
It’s also important to note that irrevocable trusts are permanently binding; you cannot change any of the terms nor beneficiaries. Once you have handed over your wealth to the trustees, they manage and transfer it according to your specific wishes.
Consider the Gift of Time
I’m noticing more and more that it’s not as much about leaving money to your children as it is enjoying the fruits of your lifelong labors through quality time with them while you’re still alive. Experiences shared as a family will mean much more to your kids than a fancy car on their 16th birthday. Rather than safeguarding your wealth to be left after you’re gone, consider buying a vacation home where everyone can gather or taking your whole family on that dream trip to Paris. These experiences will produce lifelong memories that are likely more impactful than leaving them a larger inheritance.
Consult With a Wealth Advisor
At Envision Wealth Planners, our mission is to provide goal-oriented advice consistent with the values of our firm so our clients can live their lives to the fullest. We would love to meet with you to discuss your goals and how you can leave a lasting legacy for your loved ones. Schedule a no-obligation introductory phone call or reach out to me at firstname.lastname@example.org or 407.720.6535.
Sean Gerlin is founder, principal, and financial planner at Envision Wealth Planners, an independent financial advisory firm founded on the core values of family, honesty, and a determination to be a master of the trade. With almost 10 years of experience, Sean specializes in serving affluent families and commercial real estate executives and brokers, providing comprehensive, customized financial guidance and services for their complex financial needs. Sean acts as a family CFO, managing and coordinating the many moving pieces of his clients’ financial lives. Sean is known for his commitment to building long-term relationships and paying personal attention to each client. He is passionate about helping his clients experience the relief that comes from having organized and well-planned strategies and portfolios, and he desires to help them by shouldering some of the financial burdens they face.
Sean has a bachelor’s degree from the University of Florida and holds the CERTIFIED FINANCIAL PLANNER™, Chartered Financial Consultant®, and Chartered Life Underwriter® certifications. When he’s not working, you can find him cooking, eating good food, traveling, coaching his son’s baseball team, or playing golf. He loves spending time with his wife, Nicole, and their two kids, Avery and Will, and entertaining friends in their beautiful backyard. To learn more about Sean, connect with him on LinkedIn.