By Adam K. Wright, CFA®, CFP®
The U.S. is on the verge of the largest wealth transfer in its history, with an estimated $84 trillion set to be passed down to beneficiaries by 2045. Whether you have a significant amount of assets or a more modest estate, it’s important to familiarize yourself with various wealth transfer strategies.
From simple bequeathing to intricate annuities and trusts, there are many options available for people in all financial situations. While setting up these strategies may require professional legal and financial planning, effective generational wealth transfer methods play a critical role in safeguarding and ideally extending family wealth. Many retirees reach the end of their retirement plans with unused assets, and sometimes this is a substantial number. Having a plan to transfer wealth successfully can keep Uncle Sam out of your pocket. Here’s an overview of what you can do to optimize the transfer of your wealth and leave a legacy for your loved ones.
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 directly to an organization or institution, it can help 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, and let them pay tuition or their medical bills, you might 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 taxable portion of your estate, and you can gift up to $17,000 for 2023 to a loved one before any gift taxes are incurred. If you are splitting the gift with your spouse, you can give up to $34,000 combined for 2023 to anyone. To effectively transfer wealth to the next generation, create an annual gifting strategy to maximize its benefits over the long term.
Fund a 529 Plan
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 for 2023, an individual can gift up to $85,000 and a married couple could gift up to $170,000 without incurring gift taxes! The beneficiary can then withdraw the funds and the investment growth tax-free to pay for qualified education expenses.
Limits to Wealth Transfer Planning
It’s worth noting that once you gift more than the annual limit of $17,000 per person per recipient in 2023, the excess amount spills into your “lifetime exclusion bucket.” You must use this entire amount before the IRS requires you to pay gift tax. For 2023, the current lifetime exclusions are $12.92 million and $25.84 million for individuals and married couples, respectively. You will be required to file a gift tax form for any amounts that exceed the annual gifting limits, individually or jointly. This is how the IRS will track your lifetime exclusion amount.
Going further, some families transfer wealth through irrevocable gift trusts that hold low basis assets that are expected to appreciate over the long term. These can be complicated structures that require legal guidance. However, irrevocable trusts are permanent; once set up and funded, they usually cannot be changed.
Regardless of the strategy (or strategies) you may want to explore to effectively transfer your wealth to the next generation, we suggest fully understanding the pros and cons before giving money away.
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 often mean much more to your kids when they look back on your time together. Rather than safeguarding your wealth to be left after you’re gone, consider, for example, taking your whole family on that dream trip to Paris. These experiences produce lifelong memories that are likely more impactful than leaving them a larger inheritance.
Start Today With a Free Consultation
At Wright Associates, we are dedicated to offering purpose-driven guidance that aligns with your core values, empowering our clients to live life to its fullest potential. Our team is eager to connect with you and explore your goals and dreams, helping you craft a lasting legacy for your cherished ones. Schedule a complimentary phone call to get started, and let’s take the first step toward reaching your financial future.
Adam Wright is a CERTIFIED FINANCIAL PLANNER™ professional at Wright Associates, helping clients plan and prepare their investments to retire on their terms. If you’re serious about planning for your retirement and investing for your future, his annual process will help you make the right money choices today. Therefore, Adam and his team will proactively manage your accounts while communicating the progress of your financial plans. He believes the retirement advice you receive should be intentional and actionable.
Adam has a Bachelor of Science in Supply Chain and Information Systems from The Pennsylvania State University and a Master of Business Administration from University of Pittsburgh, Katz Graduate School of Business. He lives in Upper St. Clair with his wife and two children. When he’s not working, Adam enjoys the outdoors (fly fishing), reading, and taking long runs while listening to a favorite podcast. He’s also currently encouraging himself to take up golf. To learn more about Adam, connect with him on LinkedIn.