3 Strategies to Transfer Wealth to Future Generations
By Simon Heslop
As parents, we strive to create a meaningful legacy for the next generation. This includes passing down cherished family traditions, sentimental items, and valuable advice. However, another significant aspect of leaving a lasting legacy is shielding our assets. But how can we feel confident we’re making the most of what we leave behind for our loved ones? How can we minimize the amount that Uncle Sam takes from our hard-earned wealth?
Though it may seem complex, there are ways to simplify the process while still creating a legacy that brings you pride. Let’s explore practical approaches to transferring wealth to the next generation so you feel equipped with the knowledge to create a strong financial foundation for your family’s future.
Make Direct Payments
Simply making direct payments for your children or grandchildren’s 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.
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 $17,000 for 2023 to a loved one before any gift taxes are incurred. If you are splitting the gift with your spouse, you can give up to $34,000 combined for 2023. 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 these limits, 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 2023, the current lifetime exclusions are $12.92 million and $25.84 million for individuals and married couples, respectively. You will be required to file a gift tax form for any amounts that exceed the annual gifting limits, individually or 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 for 2023, an individual can gift up to $85,000 and a married couple could gift up to $170,000 without incurring gift taxes! The beneficiary can then withdraw the funds and the investment growth tax-free to pay for qualified education expenses.
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.
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 able. 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 creating as many cherished memories as possible—maybe it’s a dream trip to Paris or maybe it’s an afternoon at the zoo. We never know what will become their favorite memories, but these experiences might be more impactful than leaving them a larger inheritance.
Prepare for Your Future Today
At FSA Wealth Management, we are dedicated to offering objective guidance that aligns with our core principles, empowering our clients to live their lives to the fullest. We invite you to connect with us and explore how we can help you pursue your goals while leaving a meaningful legacy for your loved ones. Schedule a no-obligation introductory phone call or reach out to me directly at 781-455-1020 or email firstname.lastname@example.org to begin your journey today.
Simon Heslop is Managing Partner at FSA Wealth Management, a Registered Investment Advisor firm offering fee-only services and known for its independence, objectivity, and results. With a passion for excellence and 20 years of financial services experience, Simon applies his results-driven approach to creating tailored investment and financial planning solutions for clients seeking to fulfill their vision of financial success. He has a history of developing targeted investment portfolios to help investors meet their long-term objectives, and truly enjoys the process of getting to know each FSA Wealth Management client.
Simon earned his undergraduate degree in engineering from Union College and an MBA from Northeastern University and holds the Chartered Financial Analyst® designation. Outside of work, Simon loves to hike with his family; (one day they’ll find it funny that Dad gets them lost at least half the time). He has a passion for woodworking and is perhaps one of the few people who idolize Norm Abrams and The New Yankee Workshop. He enjoys all types of bicycle riding and has a goal of riding across the country (despite the fact that he has barely ridden across New England). Simon is constantly striving to find a better and higher self, help others, and leave the world a better place. To learn more about Simon, connect with him on LinkedIn.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor. The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
FSA Wealth Management LLC (“FSA Wealth Management”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where FSA Wealth Management and its representatives are properly licensed or exempt from licensure.