Depending on one’s financial situation, handing down wealth to future generations can be more complicated than the actual wealth creation. To protect the wealth that you have created, maximize your gifts and ensure your descendants or other recipients have the ability to use these gifts wisely, you may be forced to navigate a near endless menu of trusts and other vehicles governed by a byzantine system of rules and regulations.
Some vehicles to consider are revocable trusts, living trusts, charitable remainder trusts and testamentary trusts, life insurance trusts and grantor retained annuity trusts. Your advisory team should contain professionals who are intimately familiar with the rules that govern wealth transfer, whether to a trust or a college fund or even in the form of a loan. While this is a continually evolving process, a family should not wait to get started – there may be too much at stake.
Depending on your financial situation, below are planning ideas to consider.
- The Gift that Keeps Giving
Want to begin passing along your estate before you pass? The annual exclusion on gifting totals $14,000 per person per year tax free (this is equal to $28,000 per recipient for married couples who combine gifts). The lifetime gift tax exemption is at $5.43 million and $5.45 million for 2015 and 2016, respectively. If you gift anything over this amount, you may have to pay gift taxes.
Certain kinds of gifts are exempt, however:
- a) Medical expenses paid directly to the provider
- b) Tuition payments paid directly to an educational institution
c) If in 2015, you contributed more than $14,000 to a 529 plan on behalf of any one person, you may elect to treat up to $70,000 of the contribution as if you had made it ratably over a 5-year period
For parents or grandparents who want to help children buy a home or start a business, an intra-family loan can be a good option as these loans are exempt from the lifetime gift tax exemption and interest rates on such loans are low. But be careful. If they are not properly structured, such loans can attract unwanted attention from the IRS. Be sure to have an attorney draft the note.
- For a Good Cause
If you want to make a generous donation to charity, leave a legacy —and get a big tax break—consider a charitable remainder trust. These irrevocable trusts work well with highly appreciated assets, such as stocks, fine art or real estate. The trust is structured to include a “current” beneficiary, either the donor or another named individual, and a “remainder” beneficiary. The remainder beneficiary must be an IRS-qualified charity, which could include a private foundation.
The donor transfers the assets to the trust while still alive and may receive an income tax deduction for the value of the assets. The trustee manages or invests the property so it can produce income for the current beneficiary over the term of the trust.
3. Real Estate – It’s a Family Affair
If you plan to leave real estate to the next generation—whether that’s a primary residence or a vacation home—you might want to set up an irrevocable personal residence trust, which can help to minimize estate and gift taxes. Such a trust allows the donor to continue residing at the property for a specified period of time.
If the grantor survives the term of the trust, the appreciation of the property will then be excluded from the estate. The discounted value of the property is considered a gift at the inception of the trust.
- Children with Money
You don’t want your heirs to squander the wealth you spent a lifetime building. If your children are still young or not financially responsible, you may benefit from setting up trusts for the transfer of assets, which will allow you to carefully spell out how the money can and cannot be spent—education, for example, versus a new Ferrari or a shopping spree in Paris.
As these strategies tend to be complex, it is important to work with the right team of attorneys, accountants and other advisors to make sure you can achieve your short- and long-term goals.