By Lee Sherbakoff, CPA/PFS™, CFP®, RICP®
No retirement dream is complete without envisioning the legacy you’ll leave behind. While your legacy can mean many things, in the realm of financial planning, this refers to the assets and wealth you will transfer to the next generation. In the midst of everything, planning for this aspect of your wealth can fall through the cracks and derail your dreams.
To ensure you leave a legacy you can be proud of, it’s wise to take the time to think through what you want your legacy to look like. It may be a noble goal to leave a gift that spans generations, but estate planning and gifting comes with its own set of challenges. For example, your estate may be protected now, but will that continue once in your heirs’ possession?
The process of gifting can be complex, so we’ve put together this list of steps you can take now to simplify the transition of wealth to the next generation.
1. Make Direct Payments
Simply making direct payments for your children or grandchildren’s qualified medical and education expenses is one of the easiest ways to transfer your wealth without the hassle of taxes. Many institutions will allow you to pay your grandchildren’s tuition directly from your account. You can also conveniently take care of other important expenses, such as medical expenses, by automating payments to their healthcare provider.
When you make this sort of payment to an organization or institution, it helps you bypass the burden of gift tax, which can be a hefty price to pay on your assets. However, if you gift the money directly to the recipient, you might still be subject to gift taxes.
2. Give Annual Gifts
You could also decide to gift some of your assets to your loved ones. Giving gifts helps you reduce the taxable portion of your estate, and you can gift up to $16,000 per year to a loved one before any gift taxes are incurred. If you are splitting the gift with your spouse, you can give up to $32,000 combined. To effectively transfer wealth to the next generation, you can ensure that you give the maximum amount every year.
It’s worth noting that once you gift more than $16,000 (or $32,000 if gift-splitting), the excess amount spills into the “lifetime exclusion bucket.” You must use this entire amount before the IRS requires you to pay gift tax. For 2022, the current lifetime exclusion is $12.06 million for individuals and $24.12 million for married couples. You will be required to file a gift tax form for any amounts that exceed the annual gifting limits of $16,000 individually or $32,000 jointly. This is how the IRS will track your lifetime exclusion amount.
Another great way to transfer wealth to your children and grandchildren is through the use of 529 college savings plans. There is a special provision that allows donors to contribute 5 years’ worth of gifts as a lump sum. This means an individual can gift up to $80,000 and a married couple could gift up to $160,000, without incurring gift taxes! The beneficiary can then withdraw the funds and the investment growth tax-free to pay for qualified education expenses.
3. Create Irrevocable Trusts
Creating a trust is another way to transfer wealth to the next generation. To oversee the use of your assets, you can create a trust with specific guidelines for passing your wealth to beneficiaries.
When your estate is significant, an irrevocable trust comes in quite handy. You transfer all your assets from your estate to your trust, thereby bypassing estate tax. Additionally, when you accrue income on the assets you hold in your trust, you are not personally responsible for paying taxes since the trust is considered a separate entity. As such, the trust will be taxed directly on any retained income and beneficiaries will be taxed on any distributions of income. This is an effective wealth transfer strategy since beneficiaries are typically in lower tax brackets.
It’s also important to note that irrevocable trusts are permanently binding; you cannot change any of the terms nor beneficiaries. Once you have handed over your wealth to the trustees, they manage and transfer it according to your specific wishes.
4. Consider the Gift of Time
I’m noticing more and more that it’s not as much about leaving money to your children as it is enjoying the fruits of your lifelong labors through quality time with them while you’re still alive. Experiences shared as a family will mean much more to your kids than a fancy car on their 16th birthday. Rather than safeguarding your wealth to be left after you’re gone, consider buying a vacation home where everyone can gather or taking your whole family on that dream trip to Paris. These experiences will produce lifelong memories that are likely more impactful than leaving them a larger inheritance.
5. Consult With a Financial Advisor
At The Nalls Sherbakoff Group, our mission is to create and execute financial plans that lead to sustainable long-term, real-life returns that meet your deepest and most important financial goals and objectives. Together we can help you make informed financial decisions that add value to your life and positively impact future generations.
We would love to meet with you to discuss your goals and how you can leave a lasting legacy for your loved ones. Set up a complimentary appointment so we can see if our services are the right fit for you by calling us at (865) 691-0898 or contacting us online.
Lee Sherbakoff is principal and financial advisor with The Nalls Sherbakoff Group, LLC, an independent, fee-only financial planning and investment management firm. He specializes in serving pre-retirees and retirees, helping them create and execute financial plans and retirement income plans that lead to sustainable long-term, real-life returns that meet their deepest and most important financial goals and objectives. Lee has a Bachelor of Science in Finance from The University of Tennessee and a Master of Strategic Studies from the U.S. Army War College as well as the Certified Public Accountant (CPA), Personal Financial Specialist (PFS™), CERTIFIED FINANCIAL PLANNER™ professional, and Retirement Income Certified Professional® (RICP®) certifications. Lee spent over 31 years in the U.S. Army Reserves, including serving at the Army’s highest levels on the Department of Army staff at the Pentagon and being deployed in support of Operation Desert Storm (1991) and Operation Iraqi Freedom (2008-2009). Lee lives by the motto, “As I served my country, I now serve you.” When he’s not giving his best to his clients, Lee enjoys giving back to the community and to his profession. He served as a council member of the Tennessee Society of CPAs and is a member of the American Institute of CPAs. In addition, he is past President of the Knoxville Chapter of Tennessee Society of CPAs and past President of the East Tennessee chapter of the Financial Planning Association. To learn more about Lee, connect with him on LinkedIn.
DISCLOSURES: The information provided in this letter is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy, or investment product, and should not be construed as investment, legal, or tax advice. The Nalls Sherbakoff Group, LLC makes no warranties regarding the information or results obtained by third parties and its use and disclaims any liability arising out of, or reliance on the information. Please contact us if there have been any changes in your financial situation or investment objectives, or if you wish to impose any restrictions on the management of your account or modify existing restrictions. You may contact us by phone at 865-691-0898 or email at email@example.com. Any indexes reflect investments for a limited period and do not reflect performance in different economic or market cycles and are not intended to reflect the actual outcomes of any client of The Nalls Sherbakoff Group, LLC. Past performance does not guarantee future results.