Strategies for Transferring Wealth to the Next Generation

Planning for the transfer of your wealth to loved ones may be the most rewarding result of a comprehensive financial plan.  So why is it, even those with adequate financial resources often fail to implement a detailed legacy plan?  And why aren't they enjoying seeing the plan put into action while they are still living? 

transferring wealth to the next generation.

Back when I was co-hosting workshops with estate planning attorney Chad Ritchie, we would ask attendees if they felt they needed an estate plan. Many said no; they thought it sounded complex.  Next, we rephrased the question and asked if they needed a legacy plan to honor their wishes and transfer their assets to the next generation.  The answer was a resounding yes! Actually, a legacy plan or an estate plan is the same thing!   As a financial planner, I love working with families to enhance that legacy.

A legacy plan may mean that you desire to make an impact after you've passed away.  It's typically a part of your financial plan when you're trying to make your children's or grandchildren's lives better or maybe support charity. 

But some of the greatest joy is found in optimizing that legacy plan so one can see their loved ones, or charities, enjoying their gifts while they are still living.

Legacy planning can only be accomplished with a financial plan.  First and foremost, you should make sure your needs are met.  Then, you can develop a legacy plan using your excess money but still have enough available if something unexpected should arise.

It's great to take those family vacations, spoil your grandkids at Christmas, and regularly contribute to your church or charity.  But a formal estate/legacy plan will delve more deeply into strategic wealth transfer in a way that may benefit you, as well as your benefactors.

The basics of an estate plan account for who will receive the gifts, when they will receive them and how those gifts are distributed.    Beyond that, a well-plotted legacy plan should incorporate a well-designed tax, legal, and financial plan attuned to the individual's specific circumstances.  I would recommend a team of professionals that can help implement a legacy plan outlined by a highly qualified financial planner.

Disclaimer:  While I am a financial planner, adept at the financial aspects of estate planning, and I have ample experience as a tax advisor, I am not an attorney or a certified public accountant.  I work closely with these professionals as part of a team.  I am in no way giving legal or tax advice in this article.  It's recommended readers seek their own professional counsel.

“Giving while living” strategies can vary dependent upon the individual's unique goals and financial circumstances.   In the past, I've covered tax strategies for those who wish to support charities as part of their legacy.  Today, I'll address a few advantageous wealth transfer strategies that allow the donor to see their legacy plan in action as they begin to transfer their wealth to the next generation during their lifetime.

Gifting – Gifting is perhaps the most straightforward way to share with those you care about while still living.  As of 2021, the current maximum annual amount each individual can give to another is $15,000.  Anything surpassing this will apply to the IRS lifetime exemption, which is currently $11.7 million.  It is important to note that a married couple may split their gifts, doubling their allowed annual gift tax exclusion amount.  This means that together they can give $30,000 to any one individual each calendar year.

College Education – Providing for children or grandchildren's education is an excellent option for giving while living.  In addition to cash gifts, tuition can be paid directly to a college with no limits.  Please note, both gifting and tuition payment may have an adverse effect on qualifying for full student loans.

529 College Savings Plans are another prevalent path to provide for future generation's educations.    A 529 plan offers federal and state tax benefits and high limits.  Savings accumulate tax-free, as are distributions when used for qualified college expenses.   Although these investments count towards the $15,000 limitations for gifting as outlined above, lump-sum options can make this strategy attractive.

Revocable Living Trust – An attorney can help establish a revocable living trust (RLT) for holding assets.  An RLT allows the grantor full control of the assets until passing.  Upon the grantor(s) death, it converts to an irrevocable trust in carrying out the owners' last wishes.  There may be strategic tax advantages in addition to allowing those assets to pass without going through probate.

Irrevocable Trust – An irrevocable trust can transfer wealth that is exempt from federal estate tax.  But with current exemption levels at $11.4 million, it doesn't make sense to give up control of your assets unless assets exceed this amount.  A common misconception is that an estate plan is synonymous with this type of trust vehicle, most often utilized by the extremely wealthy.

Children's Life Insurance – Obviously, life insurance can provide for loved ones after passing, but few people capitalize on the advantages of purchasing a policy on grown children.  Purchasing Universal Life insurance for your children is an excellent wealth transfer strategy that protects their younger family.  It offers immediate tax benefits and potentially tax-free retirement income for the child!  This is an advanced and highly effective strategy for reducing excessive tax liabilities over multiple generations.

There are many options available, but the right strategy can significantly increase the impact of the gifts.  When you as a benefactor can potentially reduce a future tax burden, more assets can remain in investments that may grow, potentially leaving a larger inheritance to pass along.

However, a larger inheritance may push the boundaries of state and federal inheritance tax exemptions.  At the federal level, the tax assessment is currently 40% on all assets above $11.58 million.  Additionally, you can expect a state Estate Tax depending on your state of residence.  For Illinois, there is a graduated tax, starting when an estate reaches $4 million, with a top rate of 16% at $10.04 million.  What many don't understand is that once your estate reaches $4 million, nearly the entire estate is taxed, not just the amount over $4 million.

Another potential tax time-bomb involves the distribution of assets from a qualified retirement plan.  Previously,  Inherited IRA accounts could be stretched.  However, new laws allow a maximum of ten years for full distribution.  This can lead to sizeable taxable income for your children when they are likely already at their peak earning years.  Who wants their legacy to be saddling their children with a tax burden?

We all want to provide the most we can for our families.  Overall, a well-conceived legacy plan allows more control in how it passes on and how you want to utilize it while you are living to enjoy that time with your family. You want to see it working for you today, but you still want to see how it will benefit your family in the future.  Often, sharing and enjoying the benefits of giving is the best way to maximize wealth transfer.

Bloomington Normal Retirement Planner Krista McBeathKrista McBeath is an Investment Advisor, Chartered Financial Consultant, a Licensed Insurance Advisor, a Fiduciary, and an experienced tax advisor who specializes in financial planning, investments, and insurance.

She utilizes advanced tools for in-depth calculations that analyze tax and retirement scenarios to help their clients avoid a future tax time-bomb.  Whether this means enjoying more of your hard-earned money in retirement or passing along assets to loved ones, with less tax burden, planning makes the difference.

click to schedule an appointment with financial planner Krista McBeath of Normal IL