The Tax- and Estate-Planning Implications of Your Legacy Wealth

When your financial success makes it possible, you begin to think of how the wealth you have earned can support your goals in retirement and confer benefits on your family, others you care about, and causes that you cherish. Everyone is unique in his or her specific assets, goals and values, and hopes and plans. But almost always the wealth you have built up will go to your spouse and other family members, the charitable organizations you wish to continue to support, or as taxes to the government.

For most of us, the prime goal in planning our “legacy wealth” is to ensure our own financial security and then ensure that our wealth goes to our loved ones and to our preferred charities—and does so in a way that does the greatest good.

These goals almost always are achieved most completely when you begin legacy planning as early as feasible and avail yourself of professional advice on estate planning and taxes. For example, there are ways to convey wealth in your life that significantly benefit your family and reduce estate taxes. In this context, a critical concern too frequently unaddressed even by professionals in “financial planning” is the lack of preparation and knowledge in the next generation to handle wealth. A survey by Money Magazine, and readily confirmed by professional estate-planning firms, is that some 70 percent of those now receiving legacy wealth end by significantly reducing this wealth. In other words, wealth instead of growing is lost from generation to generation.

Estate- and tax-planning firms have been responsive to that issue, with pro-active programs of education to bring spouses, children, and other relatives up to speed in managing the gift of wealth earned over many years by the previous generation.

 Residents of Montana are fortunate to live in a state that has no estate tax. Estates that reach a certain size, however, are subject to federal taxes, making tax- and estate-planning imperative.

The full planning for legacy wealth, and strategies for increasing that legacy and guaranteeing ample retirement income, require consultation with professionals. But here are some strategies that almost certainly will come up as you seek ways to transfer legacy wealth while reducing the tax burden on yourself and your beneficiaries. All of these are tax-efficient strategies:

Annual gifting

The enormous advantage of early estate planning is evident in making the most of the annual gift tax. For 2019, the federal tax allowance is $15,000 (or $30,000 for spouses splitting gifts), for each recipient. That is how much you can give each year, as gifts, without incurring gift tax. When you exceed the limit, you reduce your “federal lifetime exemption” and must file a gift tax return. The good news is giving away the maximum amount every year, if you start early, can accumulate to shift wealth to the next generation tax-free.

This earlier conveyance of wealth has not only tax advantages but enables you to observe the capabilities of your potential heirs to manage wealth. At the same time, of course, it can open opportunities for education, starting a business, or other investments at pivotal times in the recipient’s life.

Direct payments

In a closely related way, making what are called “direct payments” for certain qualified medical care or education expenses for a relative is an uncomplicated, direct means of making a meaningful gift. Are you a grandparent who wants to help put your grandson or granddaughter through college—at a cost greater than the previously discussed annual-gifting limit? Well, many colleges and universities will let you pay tuition directly–avoiding any gift-tax consequences. There are no limits on the size of these gifts; the only requirement is that they go directly to the institution.

Roth IRA conversions

Undoubtedly, you know about the Roth IRA, established in 1997, and within a decade an option selected by 50 million U.S. taxpayers with $3.3 trillion invested. When planning your legacy wealth, it could make sense—depending upon your income tax bracket—to convert some or all of your traditional IRA assets to Roth IRAs. True, in the year you make that conversion, you must pay income taxes on the amount you convert. But after that, the assets in a Roth IRA grow tax-free and when you choose can be distributed tax-free to any beneficiary you designate: your spouse, children, grandchildren, and others. Thus, Roth offers impressive flexibility to plan to support a loved one, to grow the legacy tax free, and at the right time for your beneficiary to receive your gift tax free.

Irrevocable grantor trusts

If you have any appreciated assets with a potential tax liability, you can sell them to an irrevocable grantor trust (IGT). The IGT is held for your heirs. The step removes the transferred asset (and of course any future appreciation) from your estate, but, interestingly, you retain access to a certain level of cash flow. Check it out with your professional tax- and estate-planner. There are different types of IGTs, one of the most common being a grantor retained annuity trust (GRAT).

Plan and educate heirs

This takes us back to a matter mentioned earlier. You can transfer wealth with every hope and good intention, but will those on the receiving end be financially literate in money matters? Ironically, parents and grandparents find it most difficult to discuss the life-changing potential and moral responsibility of inherited wealth with heirs who do not understand money or investments. Frankly, many don’t believe their children or grandchildren are responsible enough to handle an inheritance. And yet, it is up to those who comprehend the precious gift of inherited wealth to initiate a frank dialog with the potential recipients. Be aware that firms specializing in tax- and estate-planning are sensitive to this matter and experienced in the nuances of addressing it.

Check back here for information and insights on drafting a trust or will and help through the probate process. And be in touch with Tanko Law for expert legal and financial assistance with your tax- or estate planning needs.

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