Family Wealth Transfer Planning: Keeping it in the Family Through Generational Giving

What is family wealth, and how do you preserve it?

You have worked hard for years and accumulated wealth. You earned this money through your job, investing, and saving, and you want to preserve it for yourself and to take care of the family you love. With the projected modification of the current legislation, 2023 looks like a year to potentially benefit those interested in creating a wealth transfer planning strategy through generational giving. There are several ways to pass wealth between generations that may provide tax advantages to help preserve it for the younger generations, as opposed to watching it disappear due to a tax consequence. Here are three options that you may consider. Before making any decision, it is beneficial to consult with a financial professional so that your choices may potentially carry over not just today but into the future.

• Giving Annual Gifts – The Internal Revenue Service allows you to give an annual gift of up to $16,000 (2022) to as many people as you want without creating a tax consequence. The IRS is expected to adjust the exclusion amount in 2023 with an increase of $1,000, bringing the ceiling to $17,000. Each spouse is allowed to give for a married couple, so technically, a person can receive $32,000 (2022) without taxation, most likely increasing to $34,000 in 2023. [i]

• Direct Payments – Making direct payments for your children's and grandchildren's expenses is an easy way to transfer wealth without worrying about losing a significant portion to taxes. The IRS allows payments toward, for example, medical expenses and tuition coverage. Some institutions will enable you to pay straight out of your own account. Paying a healthcare provider or educational institution helps you to bypass the gift tax rule. [ii]

• Creating a Trust – Preserving your assets can be accomplished in various ways, including establishing a trust. A trust creates specific guidelines for passing wealth down to heirs. For somebody with significant means, establishing an irrevocable trust becomes attractive. You transfer a specified amount of assets from your estate into the trust, thus avoiding estate tax. Having an irrevocable trust means you give up control of those assets and the trust becomes responsible. If you accrue income on the assets in an irrevocable trust, you are no longer responsible for the taxes. The trust is now subject to tax on any retained income and your heirs will be taxed upon any distribution of the assets. This is a tax advantage because your heirs may be in a lower tax bracket and therefore pay a lower tax. [iii]

These are just three options you can choose when considering creating a wealth transfer strategy. For many people, leaving a lasting legacy for their loved ones is an important step when planning for the future. However, doing so is often complex and requires help from a financial professional to oversee the details and simplify the financial management so that it is a personalized and comprehensive approach. When considering generational gifting, it is critical to consider everything from retirement and estate planning strategies, taxation, current, and future cash flow, and more. Guidance from a financial professional has the potential to save you and your loved ones costly, time-consuming mistakes. Set up a consultation today!

Important Disclosures

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. 

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial. 

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by LPL Marketing Solutions

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Footnotes:

[i] Estate and Gift Tax Exemption Amounts To Increase in 2023 (natlawreview.com)

[ii] 2022 Instructions for Form 709 (irs.gov)

[iii] Irrevocable Trusts Explained: How They Work, Types, and Uses (investopedia.com)