BIG QUESTIONS FOR MONEY MOMENTS

Now that I’m wealthy, should I start gifting to the next generation and charities of interest?

Under current legislation, as a result of the Tax Cuts and Jobs Act of 2017, each individual can gift (during their lifetime) or transfer (at death) about $11.2M of assets, free of federal tax. Thus, for married couples, the amount is about $22.4M. These exemption thresholds are scheduled to increase by the rate of inflation through the end of 2025, the point at which current legislation sunsets. Any gifts made in excess of these thresholds, either during life or at death, are subject to a 40% federal tax.

Obviously, these are big exemption numbers, but if you’re young and continue to work, these thresholds can become relevant in a hurry. Moreover, these thresholds may be reduced by future legislation. Avoiding a tax haircut such as 40% should most certainly be a planning priority for you and your family.

We find that financial modelling is a good place to start. A number of inputs around life expectancy, investment returns, future savings, and anticipated living expenses can generate at least initial outputs with respect to your anticipated wealth at death. These models, tailored over time, can serve as a guiding light with respect to gift and estate planning. Along the way, here are some of the many strategies and techniques that may be used to help reduce the size of your taxable estate; and thus, help eschew estate tax:

  • Utilization of grantor trusts for children to house gifts and allow parents to pay the ongoing taxes associated with the trusts through time (implicitly, a tax-free gift each year).
  • Utilization of the annual gift exemption – the amount you can give away to any person (or a trust for the benefit of a person) each year without it counting as a reduction against your lifetime exemption ($11.2M) – currently $15K (or $30K for married couples that split the gift).
  • Loans to children (or to trusts for the benefit of children) subject to interest set by the Applicable Federal Rates as a mechanism to push investment growth outside of your estate.
  • Gifting of assets – such as company stock or a particular piece of real estate – that are expected to rapidly increase in value via Grantor Retained Annuity Trusts (GRAT) or outright transfers.
  • Gifting of partial ownership interests within a Family Limited Partnership or other structure to obtain valuation discounts on the transfers.
  • Utilization of irrevocable trusts with situs in states with no state tax to potentially avoid high tax rates in your home state (e.g. California).
  • Accelerated funding of 529 education savings plans.
  • Charitable gifting via a Donor Advised Fund, Charitable Remainder Trust, or Charitable Lead Trust.

Working with an advisory firm with in-house estate planning expertise to help navigate these potential planning opportunities can be of significant value.

Disclosures

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Have your own Money Moment Question? Ask B|O|S Principal Aaron Waxman, CPA, CFP®:

Aaron Waxman, CPA, CFP®
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