By Corey Gragg, CFP®
Many individuals and couples want to leave a lasting impression on their loved ones. For some, part of this lasting impression, or legacy, can be created by passing assets to the next generation.
The transfer of wealth can occur at death through a will, life insurance, trust, or other estate planning vehicle. Another method for transferring wealth is to make gifts to loved ones or other beneficiaries during one’s lifetime.
Important factors and considerations when contemplating wealth transfer strategies include the age of those doing the planning and the beneficiaries, the amount of assets available, and laws that govern the transfer and taxation of gifts and inherited assets.
In 2024, current tax law allows for gifts of up to $18,000 to any individual (or $36,000 if the gift is coming from a married couple) without any tax implications. That amount, called the annual gift exclusion, is adjusted annually for inflation.
If you give an amount that’s over the exclusion limit, that amount goes into a lifetime exemption bucket. So, for example, if you gift your niece $25,000 instead of the $18,000 limit for 2024, that extra $7,000 spills into a lifetime exemption bucket. In 2024, the lifetime exclusion limit is $13.61 million and $27.22 million for individuals and married couples, respectively.
More good news: You don’t have to keep track of the amount in your lifetime exemption bucket. That’s something that’s typically tallied by your accountant as part of your tax filings.
Two notable exceptions to the annual gift and lifetime gift limits are for direct payments that are made to an educational institution for tuition, and direct payments to a healthcare provider for health-related costs. The IRS allows for these payments to be made on behalf of a beneficiary, with no gift tax implications.
529 College Savings Plan
Utilizing a 529 college savings plan is another way to transfer your wealth to your loved ones. As long as the beneficiary uses the 529 funds to pay for qualified education expenses, they can withdraw the money tax-free.
In 2024, there’s a special provision that lets you contribute up to five years’ worth of gifts as a lump sum without incurring gift taxes. The contribution limits are $90,000 for individuals and $180,000 for married couples. Another recent change to tax law states that beginning in 2024, you can convert up to a lifetime limit of $35,000 in a 529 to a Roth IRA (subject to Roth IRA annual contribution limits) tax-free and penalty-free, as long as the 529 beneficiary has owned it for at least 15 years.
Revocable or Irrevocable Trust
A trust is a legal document that determines what happens with your assets after your passing. There are two types of trusts to consider: revocable and irrevocable.
Revocable (living) trusts can be modified after they’re created. Conversely, irrevocable trusts are permanently binding. The type of trust you choose is entirely dependent on your personal situation.
Revocable living trusts allow you to avoid probate court (which can be lengthy and expensive), protect your privacy, and enable more flexibility for your assets. However, a revocable trust doesn’t have direct tax benefits and doesn’t shield your assets from creditors.
Irrevocable trusts, on the other hand, are typically used by people with significant wealth who want to bypass estate taxes and other tax liabilities. Also, since this type of trust is a separate legal entity, there are different tax rules, regulations, and potential benefits associated with the use of an irrevocable trust. The biggest downside is that the person who creates an irrevocable trust gives up control of their assets, since these types of trusts cannot be changed.
There are many types of irrevocable trusts, each of which meet specific planning-related needs. For example, an Irrevocable Life Insurance Trust (ILIT) is often used to remove life insurance proceeds from a large estate to help pay for estate taxes, if needed.
Another option for transferring wealth: depending on the asset type, you can transfer assets using something called a beneficiary designation. A beneficiary designation is specified by the owner of the asset and explicitly states who should receive the asset upon their death.
Qualified asset types for beneficiary designations include retirement accounts like 401(k)s, 403(b)s, and IRAs. If you use a Transfer-on-Death (TOD) or Payable-on-Death (POD) designation, you can also use a beneficiary designation to transfer non-qualified investment and bank accounts.
One of the most notable perks of transferring assets using a beneficiary designation is the ability to avoid probate.
Creating a legal will is one of the more widespread strategies for transferring wealth. A will is often used to provide clear and organized details of what happens to any assets that are not titled in a trust.
As mentioned above, wealth can be transferred to a named beneficiary. If this is the case, the beneficiary designation takes precedence over a will. This is especially true for tax-deferred accounts because they’re typically set up with a named beneficiary.
One of the bigger advantages of using a will to transfer wealth is that it gives you complete control over who acquires your assets and how much they get—eliminating ambiguity and potential conflict.
The Gift of Time
In years past, many individuals and couples decided only to leave a legacy after their passing. Today, many families with the financial means to do so, will provide gifts during their lifetime to allow beneficiaries to benefit from gifts at a younger age, and to give themselves the opportunity to see the enjoyment of their gifts.
Estate Taxes & the Impending Exemption Decrease
Not only does gifting provide a legacy for grantors and innumerable benefits for beneficiaries, but gifting and estate planning strategies are often used to decrease (or avoid altogether) a potential estate tax bill.
In 2024, an estate that is greater than the previously mentioned exemption amount ($13.61 million for individuals) will be subject to a 40% tax on the assets in excess of that amount. Clearly, employing gifting or estate planning strategies could provide significant tax savings for a large estate.
Another major factor to consider: After 2025, provisions from the Tax Cuts and Jobs Act of 2017 will expire and the estate tax exemption amount will decrease by an estimated 50%. This change will bring estate taxes back into the equation for a significant amount of U.S. households, making now the right time to start planning.
It’s possible to manage wealth transfer on your own, but there are significant advantages to working with a qualified wealth advisor. They can use their knowledge and experience to guide you on tax laws, investment strategies, estate planning tools, and the nuances of wealth transfer.
Get Started Building a Lasting Legacy
At Elk River Wealth Management, we would love to meet with you to discuss how we can help you leave a lasting legacy for your loved ones. We’re here to help you navigate the challenges of estate planning and gifting with clarity and confidence.
To schedule an introductory meeting, email email@example.com or call (720) 452-1901. We look forward to hearing from you!
Corey Gragg is the Director of Financial Planning at Elk River Wealth Management, an independent investment advisory firm that embraces a financial planning platform in order to deliver comprehensive wealth management solutions to clients in Colorado, Arizona, Nebraska, and across the United States. Corey is an experienced wealth advisor that works with individuals, families, and business owners to put together goal-based, comprehensive financial plans. What he enjoys most is working with families to provide financial independence and peace of mind through detailed planning and seeing them reach their goals. He takes his clients’ trust in him seriously and strives to continue to earn it every day.
Prior to joining Elk River Wealth Management, Corey held various sales and advisory roles with American Century Investments, located in Kansas City. Corey holds an accounting & finance degree from Washburn University in Topeka, Kansas, a Master of Science in Personal Financial Planning through The College for Financial Planning, and the CERTIFIED FINANCIAL PLANNER™ certification. Corey lives and works in Denver, Colorado. Outside of work, he loves to hike, run, golf, and spend time with family and friends. To learn more about Corey, connect with him on LinkedIn.