Your heirs aren’t just inheriting your wealth—they’re also receiving a legacy. Financial stability and asset protection are essential components of any lasting estate, but navigating the process can be difficult. For example, your estate may be protected now, but will that continue once in your heirs’ possession?
With thoughtful and thorough planning, gifting doesn’t have to feel overwhelming! Taking proactive steps now can help preserve your legacy for the next generation and beyond—providing financial peace and confidence you can’t put a price on.
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 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 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 these limits, 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 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.
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.
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 Manager
At Anderson Financial Strategies, our clients lead unique lives and need a specialized touch from a firm that understands the opportunities and challenges they face. Our mission is to give you relationship-based, premium financial expertise with rapidly responsive service. Our team wants you to feel excited and confident about your future—and the future of your heirs—and we’d love to help make that a reality for you.
If you would like to meet to discuss your goals and how you can leave a lasting legacy for your loved ones, please call us at 855-237-4545 to schedule an executive briefing.
Shon Anderson is president and chief wealth strategist at Anderson Financial Strategies, LLC with over 15 years of experience. As a fiduciary, Shon’s mission is to provide his clients with quality financial expertise along with rapidly responsive service through an honest relationship. He specializes in providing family office-style services to help his clients organize and focus their financial life. Shon graduated from Wright State University with a bachelor’s degree in financial services and an MBA in finance. He is a CERTIFIED FINANCIAL PLANNER™ practitioner and holds the Chartered Financial Analyst® (CFA®) certification. His insights have been quoted in leading financial news publications such as CNBC, Yahoo Finance, Fox Business, Consumer Reports, Forbes, Bankrate.com, Investment News, and Kiplinger. Shon serves as an adjunct professor teaching personal finance courses at Wright State University, leads CFP® exam review courses for Keir Educational Resources, and is president of the CFA Society Dayton. Shon and his wife, Jessica, reside in Sugarcreek Township, Ohio, and are blessed with triplet daughters, Elizabeth, Bridgette, and Alexandra, along with their son, Jacob, and dog, Jack. Over the years, Shon has been involved in several volunteer organizations including the Wright State chapter of Delta Tau Delta as an alumni advisor and was a Big Brother in the Big Brothers/Big Sisters program. To learn more about Shon, connect with him on LinkedIn.