Generational Wealth Transfer Strategies to Minimize Taxes and Fees

Four Simple Gifting Strategies

How do you transfer your wealth and property to the next generation before you pass on?

While the question may be unappealing to consider, gift and trust planning is a critical part of your long-term financial plan. By planning ahead, you can better direct exactly where your hard-earned wealth ends up and help your heirs avoid large estate transfer taxes and fees in the process.

The economic upturn of the past decade has resulted in many households (knowingly or unknowingly) crossing over into net worth thresholds that could result in long-term estate tax consequences at both federal and state levels, depending on where you reside (looking at you, residents of Washington State).

One of the simplest methods to ensure a tax-efficient transfer of wealth to your relatives is to begin setting up your inheritance early through strategic gifts that your heirs can use immediately or to help prepare them for the future. Depending on your long-term goals and financial circumstances, gifting throughout your lifetime can be a powerful tool to ensure most of your wealth ends up at its intended destination.

Here are 4 simple gifting strategies to consider.

1. Gifting Cash

Gifting cash to your loved ones in an amount less than or equal to the annual gift tax exclusion is as simple as it gets for generational wealth transfers. For 2022, this allows for gifts of up to $16,000 for individuals and $32,000 for married couples without the need to file a gift tax return (Form 709) and eat into your lifetime gift exclusion amount ($12.06M per spouse). For example, a husband and wife can gift $16,000 to each of their two children in 2022 for a total transfer of $64,000. While the previous example applies to children, it can also apply to grandchildren, great grandchildren, or that random neighbor you’ve always liked.

When used year-over-year, this straightforward strategy becomes a powerful wealth-transfer technique.

2. Setting up a College Savings Plan

Funding 529 College Savings plans for your kids and grandkids allows you to retain some control of your funds and allow them to grow, even though they are removed from your estate. You can fund college savings plans annually by making gifts of up to $16,000 per individual (for 2022) or by utilizing special 5-year, lump sum super-funding tax provisions. For example, a married couple can contribute $160,000 per child or grandchild this year without incurring any taxes. An informational gift tax return (Form 709) should be filed when transferring wealth through a college savings plan, but the gifts and all future appreciation will reduce the taxable estate at the federal and state level, if applicable.

3. Paying College Tuition or Healthcare Expenses Directly

The IRS allows for two exceptions to the annual gift tax exclusion limit:

1. Tuition
2. Medical bills

When payments are made directly to healthcare or educational institutions, the $16,000 limit does not apply. This remains consistent whether it is your child, grandchild, other family member, or even just a friend. Better yet, you are still allowed to give the additional tax-free annual gifts up to the $16,000 exclusion amount without impacting your lifetime gift exclusion.

4. Gifting of Appreciated Stocks or Mutual Funds

For anyone in a higher tax bracket, gifting highly appreciated assets to individuals in the lowest two brackets (currently 10% and 12%), or to someone who doesn’t fully utilize their standard deduction, can be especially appealing for generational wealth transfers. That’s because heirs will benefit from a 0% rate on the realization of long-term capital gains and qualified dividends. Any subsequent sale would result in no capital gains tax being paid, as long as the mentioned sale doesn’t push your heirs over the 12% tax bracket. However, if the gift is to a child under the age of 19, or a college student under the age of 24, beware of Kiddie Tax implications.

Each of the strategies listed above can be simple, yet effective tools in reducing potential estate tax exposure, maintaining flexibility, and accomplishing gifting goals to heirs during one’s lifetime. However, it’s important to understand the impact of gifting to be sure that the wealth transfer strategies you pursue align with your long-term cashflow needs and unique financial goals.

For more ideas around charitable gifting, read our article “Year-End Charitable Gifting Strategies“