Assessing tax options can determine the best way to conduct business or personal transactions and inheritance to reduce or eliminate tax liability. Tax avoidance differs from tax evasion, which reduces tax liability through concealment or deceit. Tax evasion is a crime, but tax avoidance can lower your tax bill by structuring transactions to save the most money.

Minimizing Your Heirs’ Tax Burden

Inherited assets often come with tax burdens, and planning ahead can simplify some of the processes and lower taxes for your heirs. Depending on the state of the deceased’s estate, inheritance taxes will differ. As laws and regulations change regarding inheritable assets, your estate planning attorney can conduct a routine review of your plan to ensure transferring wealth is tax-efficient.

Gifting Your Money And Assets

The most direct way to minimize inheritance tax is to start gifting your heirs money each year while you’re still alive. Taking advantage of the gift tax exclusion of $17,000 per year per person is a quick way to transfer non-taxable cash or assets to heirs. A married couple can gift $34,000 yearly to each child or other inheritor without tax consequences to the gifter or the recipient.

Life Insurance

A solid insurance plan can also set up future inheritors without tax consequences. Choosing between whole life and term life insurance will determine how long the policy will last. A term or whole life insurance policy generally provides the beneficiary a death benefit not subject to income taxes unless they receive payouts in installments.

Irrevocable Life Insurance Trusts

An irrevocable life insurance trust (ILIT) can control whole or term life insurance policies while the owner is alive. Transferring your policy to the trust or using the trust for purchase means you own your insurance policy as the trust grantor. You can determine who administers assets, designate beneficiaries, and the terms of receiving benefits. Your estate planning attorney helps you set up the trust and properly fund it.

An ILIT removes the life insurance policy from your gross estate, which minimizes or eliminates estate tax liabilities on assets not qualified as marital or charitable deductions. The policy provides immediate liquidity to the decedent’s estate and beneficiaries upon the insured’s death.

Death Benefit Annuities

An annuity with a death benefit pays a lump sum to a beneficiary. There are also joint-and-survivor annuities that provide a guaranteed income stream to the beneficiary for life. While annuities are subject to tax, they can be structured to minimize the tax burden to the beneficiary.

Retirement Accounts Converted to Roth Accounts

Heirs will pay tax on any inherited retirement benefits if they are in a 401(k) or Individual Retirement Account (IRA). However, taxes on a Roth 401(k) or Roth IRA are already settled upon conversion, so there is no additional tax on distributions. While this is great for inheritors, when the owner converts a standard 401(k) or IRA to Roth, there will be regular income tax consequences for the conversion to occur.

Real Estate

Real estate is one of the most significant non-liquid assets to pass on to heirs. Capital gains tax will apply to real estate, and the recent IRS Revenue Ruling 2023-02 removes the step up in basis even if the real estate is in an irrevocable grantor trust.

However, this new ruling doesn’t apply if the irrevocable trust is in the grantor’s gross estate. The rules and applications are complex and will require the review of an estate planning attorney to decipher.

If the property is not in an irrevocable trust, there are three other options to pursue:

1. Sell it – If you plan on downsizing or putting your home’s equity to use elsewhere, selling the home to an heir might be a good option. It removes the property from your taxable estate, establishing a new cost basis. The property’s future sale has a cost basis tied to the home’s value on the date of transfer, lowering capital gains tax. Do not, however, sell the property below fair market value, or the difference may be subject to gift tax.
2. Gift it – While a generous gift, providing a home to an heir during your lifetime might have negative tax consequences. This gift will count toward your lifetime gift tax exemption which may not be a problem now, but in 2026, the exemption will be cut in half as adjusted for inflation. Depending on your estate’s size, it may result in up to 40 percent federal estate tax. State-level gift, estate, and inheritance taxes may also be a factor depending on where you live.
3. Pass it Down – Depending on how many heirs you have and their ability to maintain a property, you can leave your home in your will, a living trust, or in some states, a transfer-on-death deed. Again, these methods may no longer receive a step-up in cost basis and should be discussed at length with your estate planning attorney before making a decision.

Stock Investment Accounts

Unlike other gifted securities, inherited stocks don’t maintain their original cost basis. Upon inheriting a stock, the inheritor receives a step-up in cost basis determined by the stock’s value at the date of death. If you have held dividend-producing stocks for a significant time, the cost basis may make selling financially unproductive. However, an inheritor with a step-up in cost basis can immediately sell the stock to create cash flow without tax consequences.

Capital gain tax methods are a highly-contentious topic in the ongoing debate of inheritance and taxes. Often regulations may change without Congress enacting a law, as in the case of IRS Revenue Ruling 2023-02. To ensure your strategy is in tax compliance and advantageous to inheritors, review your estate plan routinely to account for any legal changes.

Estate Planning Attorneys and Tax Planning

Your estate planning attorney can help you legally minimize tax liabilities to your heirs by gifting assets during your lifetime, establishing trusts, and leveraging exemptions. Tax-advantaged accounts, capital gains tax planning, and other tax-efficient investments like life insurance can minimize taxes to your heirs.

Further, you can use family and charitable trusts or philanthropic foundations to receive tax benefits. There are many creative ways that your estate planning attorney can legally help to minimize taxes to your heirs. Estate planning guidance is key in creating wealth transfer management and tax strategies. Your attorney can provide personalized advice based on current tax laws and regulations and work with your tax advisor to create the best outcome for your heirs.

We hope you found this article helpful. Contact our office at (740) 947-7277 and schedule a free consultation to discuss your legal matters. We look forward to the opportunity to work with you.

The post Legally Transferring Wealth to Heirs While Avoiding Taxes appeared first on Seif & McNamee.

The post-WWII economic environment allowed the growth of assets during decades of economic prosperity. Rising real estate values, stock markets, and favorable tax policies contributed to the baby boomers’ ability to aggregate significant wealth. These 45 million households will see their generational wealth pass to Generation X and millennial inheritors, dramatically shifting the landscape of American wealth management.

Baby boomers collectively hold thirty to forty trillion in assets, controlling roughly seventy percent of all disposable income. While families of already established generational wealth may have plans in place, much of the upcoming wealth transfer hails from self-made men and women who have avoided discussing estate plans and family fortunes with their heirs. Predictions are that Gen X will inherit about 57 percent of these assets, with millennials inheriting the rest. Yet the mechanisms for inheritance through sound estate planning are missing in many of these family systems.

Wealth management groups and estate planning attorneys posit that inheritors will needlessly lose much of their wealth due to parents who failed to develop comprehensive end-of-life plans. On the other side of the equation, younger generation inheritors must ramp up their knowledge about asset management to grow their inheritance for future generations.

Generation X and millennials have vastly different financial experiences and attitudes towards money than their parents. On average, while millennials are the highest-earning generation, they have significantly less money, controlling just 4.6 percent of US wealth in 2021. They have lower levels of financial literacy, are less likely to own a home, and have less interest in investing in the stock market. They also tend to have higher debt after experiencing two recessions before the age of 40, cost of living increases that outpaced wages, and increasing college tuition and vehicle loans.

These younger generations will also change the landscape of financial planning and management. Financial firms will have to bridge the gap of immediate expectation with a generation raised in an era of enormous technological transformation. Smart technology can provide an incrementally higher return on investment through transaction speed alone. Digital financial tools and apps will be the norm, including robot advisors as a convenience for investing.

Are these younger generations ready to be stewards of generational wealth? Will they see the need to protect this wealth through comprehensive estate planning? To better protect their inheritors’ interests, baby boomer parents can include their children in estate planning goals. The older generation can implement or update an existing plan and guide their inheritors to protect from squandering assets.

Some family systems may find the surest and safest way to protect generational wealth is via trusts. Both revocable and irrevocable trusts can create structure and limit new inheritors’ access to assets. A trust can grow wealth and also save on taxes. The objectives and conditions of a family trust are wide-ranging and easily tailored to a family’s specific needs.

Charitable trusts and charitable remainder trusts can generate income for heirs while protecting assets and favorable tax consequences. There are also asset-protection trusts, testamentary trusts, and special needs trusts. A qualified estate planning attorney will assess the best trust type(s) for you and your family based on your unique set of parameters. With trillions of inheritable dollars in motion over the next twenty-five years in America, proactive estate planning is key to securing generational wealth for your family. We hope you found this article helpful. Contact our office at (740) 947-7277 and schedule a free consultation to discuss your legal matters.

The post US History’s Largest Transfer of Wealth appeared first on Seif & McNamee.