Estate planning can be complex, but the benefits far outweigh the potential hassles.
A living inheritance offers a streamlined solution to make leaving a legacy and passing on assets to family easier than commonly believed. Rather than waiting until your last wishes to make an impact with your money, the process can begin today.
Understanding Your Own Needs
As we live longer and healthcare costs continue to rise, you have to take a moment to consider your own needs before creating a giving strategy and distributing your assets. Start by taking a comprehensive look at your assets, including both liquid and illiquid ones, as well as any real estate properties and insurance policies.
- Cash and cash equivalents (savings accounts, checking accounts, money market accounts)
- Marketable securities (stocks, bonds, mutual funds)
- Certificates of deposit (CDs)
- Treasury bills (and other short-term government securities)
- Real estate properties (residential homes, commercial buildings, land)
- Business interests (ownership in a business or partnership)
- Artwork, collectibles, and antiques
- Intellectual property (patents, copyrights, trademarks)
- Vehicles, boats, and other recreational assets
This will give you a clear understanding of what you require and what assets are available for distribution.
Leveraging Gift-Tax Exclusions
One effective way to reduce future tax liabilities is to remove assets from your estate now. You can begin by taking advantage of the annual gift tax exclusion, which allows you to gift up to $17,000 per year ($34,000 for a married couple filing jointly) in 2023 without owing tax.
Advisor Note: These gifts don’t count against the lifetime tax exemption of $12.92 million.
Moreover, you can contribute funds for education and medical expenses without incurring any tax liability or affecting the lifetime exemption. Educational gifts cover a wide range of expenses, from early childhood education to graduate school, as long as the gift is directly paid to the qualified institution. Medical expenses, including insurance, also fall under this category. By helping out with these expenses, you not only alleviate the financial burden on families, but also reduce the taxable value of your estate.
Giving Appreciated Assets
If you have assets that have significantly appreciated, such as equities with a low basis, you can gift shares to individuals in a lower tax bracket to help you avoid capital gains taxes.
However, it’s important to consider the needs of the recipients and evaluate whether it would be more advantageous to keep these assets in your estate to take advantage of the step-up basis when they pass on to your beneficiary. This strategy works particularly well for children or grandchildren in lower tax brackets, allowing them to pay 0% capital gains tax.
Transparency and Tailored Gifts
While it’s a good starting point to give an annual gift of the same amount to each child or grandchild or allocate a specific sum for each child’s education, it’s crucial to consider the perspectives of both the giver and the recipients when it comes to larger sums.
Ask yourself some important questions:
- How will the money be utilized?
- Could a substantial gift complicate life choices?
- Are the recipients responsible enough to handle the funds?
- How can you protect the assets if necessary?
Providing funds now can make a significant difference in the lives of your loved ones. It can support their career choices, help them achieve personal goals, fund artistic endeavors, or make further education possible. However, it’s vital to handle such gifts with care, as they can also introduce new challenges.
Make sure everyone involved understands your intentions and establish appropriate safeguards.
Consider options like setting up trusts to protect both the funds and the recipients, transferring property, or implementing an annuity arrangement with regular payments. Additionally, setting milestones to ensure the gift’s intended purpose is met can be effective. Having a trusted advisor, such as an attorney, CPA, or financial advisor, involved in these discussions can help maintain clarity for everyone.
Taking a modern approach to wealth allows you to create your legacy now and witness the positive impact it can have on the lives of others.
Prioritize addressing your own needs, develop a formal plan, and ensure that everyone involved understands the amount, intent, and timing of the gift.
While reducing estate taxes is a potential benefit of a living inheritance, it can ultimately help you and your loved ones live to the fullest now, not in the uncertain future.