How To Pass Down Wealth In An Efficient And Tax-Friendly Way

Your legacy is the centerpiece of your estate plan. 

Creating a plan that encompasses your vision, hopes, and dreams for the future can be both exciting and overwhelming. On top of leaving memories, habits, and values that hopefully live on for generations, you also have to think about the best ways to pass your assets to heirs. 

In general, your estate plan comes down to three goals:

• Defining your intent
• Maximizing efficiency
• Minimizing time, costs, and taxes

The combination of the three depends on your unique situation. For many, it’s critical to be tax-conscious when passing down wealth.  

Estate or death taxes can present some hurdles for your heirs. You want more of your money to pass to heirs or charitable organizations that bolster your legacy instead of lining Uncle Sam’s pockets.

How can you bring tax efficiency to your estate plan?

Here are a couple of strategies to consider.

Understand How Your Assets Are Taxed

First things first: know the tax treatment for your assets. 

Perhaps the most significant change to remember is the elimination of the stretch provision for most non-spouse beneficiaries on inherited IRAs. Before the SECURE Act, beneficiaries of inherited IRAs could “stretch” distributions throughout their life. But now, the time frame is much tighter; all funds must be withdrawn within ten years.

With many beneficiaries in peak-earning years, this change could cause a significant tax burden. It may be wise to double-check your IRA beneficiaries. 

Keep an Eye on Federal Estate Tax Exemption 

Even though the federal estate tax exemption is sky-high in 2024, $13.61 million (or $27.22 million married filing jointly), that higher limit brought about by the Tax Cuts and Jobs Act (TCJA) sunsets in 2025, so the exemption may decrease significantly.

The White House has already discussed the possibility of lowering the exemption. Several politicians have previously proposed slashing it to as low as $3 million, but the current administration has proposed $5 million. 

Remember, these are simply proposals; Congress hasn’t passed a new law. If the TJCA provisions end before Congress approves new legislation, the estate tax will be suspended. 

With the exemptions as high as they are, several people think they won’t have to worry about reaching them. But many underestimate the value of their estates. It’s easy to account for your retirement, brokerage, and savings accounts, but what about other assets?

• Do you have out-of-state assets like property?
• Do you own rental properties?
• What’s the value of your home?
• How much life insurance do you have?
• Do you have advanced retirement benefits like equity or deferred compensation plans?

These assets are valuable and can quickly add up—making $3 or even $5 million not out of the question to reach. 

What happens if your estate surpasses the limit? The IRS taxes any investments/assets over the allowed value at a 40% tax rate. It’s essential to understand your entire financial picture to plan for estate taxes properly. 

Give More Money Throughout Your Life

While leaving an inheritance can be a meaningful extension of your legacy, it can also be fruitful to give away more money, assets, and belongings while you’re alive to see your loved ones enjoy them.

Think about it like this. If you give your daughter money to help supplement a down payment on her family’s dream home, you can enjoy family dinners and activities, building so many precious memories. 

Giving money while alive also actively lowers the value of your estate, which can be helpful when it comes time to add everything up. You could give money directly or fund a 529, custodial account, or other investment accounts. In 2024, the federal annual gift tax limit is $18,000 or $36,000 for married couples filing jointly. 

You will have to pay taxes if you exceed the limit. Your tax rate depends on how much you give above the limit; it ranges anywhere from 18-40%. If you want to give more, there are a few ways to circumvent the gift tax rule. 

• You can make unlimited payments directly to a medical or educational institution. 
• Fund a bulk contribution to a 529. You can put in 5 years’ worth of contributions at a time, and since the annual gift limit is $18,000, that adds up to $90,000. 

Establish The Right Trust

A trust can be an integral part of many people’s estate plans because they are efficient and often tax-friendly ways to pass down wealth. Since trusts avoid probate, they can help expedite the wealth transfer process and save your family and estate on administrative, legal, and court fees. 

Trusts also invoke an administrative process, which may bring more structure to your assets. For example, you may want to set up a trust for your children that delays full access to the assets up to a certain age and only allows distributions for education costs. Using a trust can help you accomplish your intent: funding your children’s education while also bringing built-in organization to the process.

There are two broad categories of trusts: revocable and irrevocable, and the primary difference comes in their flexibility. 

Revocable trusts, which tend to be more prevalent for our clients, can be changed at any time. The grantor can alter the terms, add or amend beneficiaries, and even access funds within the trust. But the downside is that there is less creditor protection and fewer tax benefits. 

Irrevocable trusts don’t have the same flexibility. It’s quite complex to make any changes once you establish an irrevocable trust. Irrevocable trusts tend to have more estate tax benefits since the assets technically belong to the trust, not the grantor. These vehicles can also be helpful if you want to protect your assets from creditors. 

Once you have a trust, it may be time to create a plan for which assets should fund it. Typically, after-tax brokerage accounts and real estate tend to work nicely in trusts. 

Doing so can complicate the asset, especially when real estate is involved. If you titled your house to the trust and wanted to sell your home to downsize in retirement, you would need to go through extra administrative red tape before selling, for example. 

Maximize Efficiency and Minimize Taxes

There are several ways to bring efficiency to your estate plan depending on your intent, desired beneficiaries, assets, and more. 

For you, that might mean making a beneficiary a joint owner on a checking or savings account to expedite the transfer when you pass away. People often take joint ownership for granted, but it can be an excellent tool depending on your circumstances. It’s also perhaps the most efficient tool for transferring cash. 

Married couples can also take advantage of joint ownership on real estate and other taxable accounts like brokerage accounts and other investments. 

Pro Tip: Select your beneficiaries wisely. Simply naming the proper beneficiary can be a powerful estate planning tool. Work with your attorney to make sure your beneficiaries are updated to reflect your goals. 

Creating an estate plan that honors your intent, maximizes efficiency, and minimizes costs and taxes is a tall order, but it can be done with the right team by your side. Here at Legacy Wealth, we’re passionate about helping you build a plan that works best for you and your family. Get in touch with us today to see if we can help you coordinate your financial plan with your estate plan.

Disclosure:

Advisory services are offered through Legacy Wealth Advisors, LLC dba Legacy Wealth Advisors, an Investment Advisor in the State of Michigan. The information contained herein should in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services to any residents of any State other than the State of Michigan or where otherwise legally permitted. All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor is it intended to be a projection of current or future performance or indication of future results. Moreover, this material has been derived from sources believed to be reliable but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed.