Ensuring your money is passed on in the manner you desire is important for individuals who have amassed considerable assets during their lifetime. In addition to establishing a financial foundation for future generations, creating an informed plan to pass on your wealth can greatly reduce your overall income tax burden and save on estate taxes in the future. A financial advisor is prepared to walk you through the strategies that will maximize the continuity of your wealth while minimizing your tax burden. Here are a few strategies for passing on your wealth.

Utilize Annual Exclusion Gifts to Transfer Smaller Amounts Tax Free

The annual gift tax exclusion is the foundation to any planned program of lifetime giving. In 2017, an individual can gift up to $14,000 to as many recipients as they like without incurring any gift tax liability. This annual exclusion is the simplest, most tax-efficient way to lessen your estate’s tax burden. Married couples have the option of giving joint gifts, meaning they can double the gift size to an individual recipient to $28,000. Gifts can come in the form of cash, stocks, contributions to 529 Plans, real estate – in effect, any form of property so long as you relinquish ownership and control of the asset.

If you and your spouse have four children, you could thus give joint gifts amounting to $28,000 to each child, for a total of $112,000 each year. If all four of these children are married, you and your spouse could give joint gifts of $56,000 to each couple, for a total of $224,000 each year – all tax free. This strategy keeps wealth within the family while lowering the amount gifted from your estate, thus making your overall estate smaller and less burdensome for tax purposes. While most commonly used for passing wealth within a family, annual gift tax exclusions can be used for any recipient – family, friends, charitable organizations.

Use the Lifetime Gift Tax Exemption to Reduce Estate Taxes

Annual exclusions are not unlimited. For 2017, the inflation-adjusted amount you can transfer without incurring estate and gift taxes is $5.49 million per individual and $10.98 million for a married couple. This “lifetime exemption amount” effectively allows an individual to gift up to $5.49 million without paying the federal gift tax, which at its highest rate is 40%. Beyond this lifetime cumulative total, you must pay federal gift taxes.

Choosing which assets to gift is an important calculation in your overall gifting strategy. The transfer value of an asset is fixed at the time it is gifted – by passing on assets that have already matured, you may be handing the recipient a sizable capital gains bill. To mitigate unforeseen tax burdens on recipients of your assets, it is important to consider which assets will provide the most value per gift tax dollar paid with a trusted wealth manager.

Gift Tax and Estate Tax are Unified

The gift tax exclusion and the estate tax exclusion are commonly referred to as the “unified credit.” In effect, gifts above the annual $14,000 exclusion amount are not subject to immediate taxation, but they do count against the $5.49 million lifetime gift tax exclusion. Lifetime gifts thus reduce the amount available to offset estate taxes when you die. For example, if you make taxable lifetime gifts worth $4 million of the $5.49 million unified credit, then only the remaining $1.49 million of your estate will be exempt from inheritance taxes if you die in 2017.

For married couples, this unified credit is portable. Upon your death, the remaining $1.49 million of unused credit will transfer to your spouse. If your spouse has their full $5.49 million credit remaining, he or she can then gift up to $6.98 million tax free under the same lifetime gift tax exclusion rules.

Gifting for Education and Medical Expenses – Tax-Free Payments for Future Generations

While maximizing your annual gift tax exclusion is a great way to help a child kick-start retirement savings, make a down payment on a house, or provide a charitable donation to your favorite non-profit, investing in your children or grandchildren’s education or health is also an effective way to pass on your wealth tax free.

Unlimited tax exclusions exist when payments for tuition are made directly to the educational institution, and similarly when health expenses are paid directly to the medical provider. These exclusions provide meaningful ways to invest in the intellectual cultivation and good health of future generations. Pay for your grandchild’s perfect smile with tax-free payments to their orthodontist and, later, invest in their higher education with direct tuition payments to their university. However, qualified education expenses do not include dorm fees, books, supplies, or other school-related expenses under this tax-free avenue.

529 Plans Offer a Tax-Efficient Alternative for Passing on Wealth

529 Plans are dedicated college savings accounts that permit tax-free contributions provided that the money is used for qualified college expenses, which include dorm fees, books, and supplies. While 529 contributions are subject to the annual gift exemption (currently $14,000 per child annually), gifts can be “front loaded” or given all at once to meet a maximum over multiple years. For example, a one-time gift of $70,000 would cover 5 years of maximum contributions, but the additional compounding interest in that account would not be subject to a gift tax.

An affluent individual looking to avoid gifting limitations could simultaneously pay tuition expenses directly to the institution and gift to a 529 account at the maximum rate. This combination of strategies is most helpful to those looking to reduce their estate by more than the amount subject to the gift tax, and can reduce the need for the 529 funds on the part of the named beneficiary. This way, the money contributed to a 529 account can grow tax deferred and be passed on to later beneficiaries, even those in the next generation.

Gifting Strategies are not One-Size-Fits-All

The plan you create to pass on your wealth will depend largely on what your financial goals and priorities are. Finding the strategy that is suitable for your financial situation and family goals can greatly reduce your tax burden while uplifting the generations that follow. Your trusted Bronfman Rothschild Wealth Advisor can help you allocate your wealth so that your family realizes your vision of the future.


1 5 Family Gifting Strategies, Forbes

2 Wealth in Transition: Gifting Strategies, WSJ

3 Why You Should Front Load Your 529 Plan

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Crystal Wipperfurth, CFP®, CRPC®

Crystal is a wealth advisor in our Madison, Wisconsin office.