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What are the top five gift and legacy–planning ideas that you should be considering?

“Although talking with your children about your legacy, your estate and their future inheritance can be uncomfortable, it’s a conversation that’s essential for them to understand your actions and to prepare them for the financial responsibilities of wealth.”

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Given the recent substantial increase in the estate and gift tax exemption (from $5.49 million in 2017 to $11.4 million this year) combined with future uncertainty (without legislative action, the exemption is slated to drop to around $6.5 million in 2025), many wealthy investors are taking advantage of the current environment to gift potential legacy assets for optimal tax benefits.1

The following are just a handful of the many solutions—some exceedingly simple, some more complex—that are available to proactive planners who want to benefit from this unique window of opportunity.

We’ve all seen reports about the skyrocketing amount of student debt and its potentially adverse impact on the financial health of future generations. Under special rules unique to 529 plan accounts, you can elect to make a single lump-sum five-year gift of up to $70,000 ($140,000 for a married couple) to each of your children and/or grandchildren.2 It’s an ideal way to save for the future education of a child where the funds can grow tax-free and be used for any qualified education expenses. However, grandparents may want to consider contributing to an account set up by the child’s parents to avoid their gift being considered “student income” in determining financial aid eligibility.

If charitable giving is important to you, there’s no limit to the amount you can contribute to a donor-advised fund. DAFs allow you to make a charitable contribution now (receiving an immediate tax deduction) and assets are able to grow tax-free until you direct them to a public charity you wish to support. And assets like appreciated stock that you may not be able to gift directly to a charity can be easily gifted through a DAF since they’re liquidated and converted to cash when donated.

If you’re 70½ or older, you can use a qualified charitable deduction to transfer up to $100,000 annually directly from your traditional IRA to a public charity.3 Not only can this strategy be used to satisfy your annual RMDs, but the funds won’t count as income and do not need to be included as an itemized deduction on your taxes since they transfer directly from the IRA to the charity.

One of the most tax-efficient ways to transfer your wealth is by purchasing a survivorship policy within an irrevocable life insurance trust. Not only are policy costs considerably lower when based on two lives rather than a single life, but also the death benefit paid out to your heirs will be both income- and estate-tax free. Trust-held life insurance offers a tremendous opportunity to leverage the value of your legacy, as well as providing the means for your heirs to pay off any estate taxes after your spouse dies.

Funded with a gift up to the amount of your generation-skipping tax exemption, a dynasty trust can provide for future generations as long as state law permits the trust to remain in existence. Any future appreciation and income earned by trust assets can then be transferred to subsequent generations without being subject to estate and gift taxes. And the value of the trust can be further amplified when funded with life insurance.

Although talking with children about your legacy, your estate, and their future inheritance can be uncomfortable, it’s a conversation that’s essential for them to understand your actions and to prepare them for the financial responsibilities of wealth. Perhaps you don’t plan on equalizing inheritances because one child has special needs, or a large asset (like a family business) has already been gifted.

To reduce the potential for conflict, make sure you leave behind a letter explaining your intentions and motivations and talk to your attorney about adding a “no contest” provision to your will that would disinherit any child who challenges the division of property. Perhaps most important, consider inviting your children to participate in your next financial planning meeting. It can help them establish their own advisory relationship and open the door to future conversations about wealth, financial behaviors and how to work together in achieving long-term family financial goals.

  1. IRS Rev. Proc. 2018-57
  2. IRS Instructions for Form 709
  3. IRS Publication 590-B

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This information is not intended to be a substitute for specific individualized tax or legal advice. Neither royal Alliance Associates, Inc. nor its registered representatives, offer tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.

Securities offered through Royal Alliance Associates, Inc., member FINRA/SIPC. Investment advisory services offered through SEIA, LLC. Royal Alliance Associates, Inc. is separately owned and other entities and/or marketing names, products or services referenced here are independent of Royal Alliance Associates, Inc. (CA Ins. License Jennifer Kim  #0B11807)

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