Strategizing a Tax-efficient Wealth Transfer Plan
When discussing legacy planning and wealth transfer, it is important to consider the financial implications that will come to those who receive your generosity. Considering the most tax-efficient methods should be at the forefront of these discussions in order to maximize your gift and alleviate future stress. Rather than procrastinating this difficult planning stage of life, it is beneficial to establish who will receive what, how they will receive it, and when they can use it sooner rather than later.
You’ll want to sit down with a qualified financial advisor who understands tax implications thoroughly to create a tax-efficient plan that addresses the distribution of your assets and the long-term needs of your loved ones. Although it may seem tricky, here are a few tips for how to get started:
- Hire a competent and educated advisor to help you identify your needs and goals. One key way to do this is to ask yourself, “What ‘slice of the pie’ should go to which person? Do I have a plan for how my loved ones will be taken care of?”
- With your advisor’s assistance, determine your risk tolerance, develop a wealth and tax approach, and identify asset protection plans.
- Determine to whom, how much, and when you will distribute your wealth.
- Develop a periodic review and analysis process with your advisor to reassess your goals and make any necessary adjustments.
Ways to Transfer Wealth
Whether your goals include reducing the tax your loved ones might pay when inheriting or distributing your wealth now to share in their joy, there are several options available to you.
Annual Gifts
Gifting now allows for an annual gift tax exclusion. The annual exclusion amount for 2023 is $17,000 ($34,000 per married couple). There is also a lifetime gift exclusion, and as long as you are under this amount, your heirs are not subject to federal gift tax if you are unable to pay it before passing.
Roth Conversion
Converting your IRA to a Roth IRA means that you pay the tax now and let the assets grow tax free for a longer period of time. This allows your loved ones to inherit a potentially larger amount of tax free money in the future.
Direct Payments
Direct payments can include certain medical or educational expenses for loved ones paid directly to the healthcare provider or university and will enable you to bypass the gift tax altogether.
529 College Savings Plan
For qualified education expenses, distributing money to a college from these plans is free of federal income tax. To learn about Indiana 529 tax credits, click here.
Irrevocable Trusts
With these, you can permanently transfer your assets to the trust and bypass estate tax, but the distribution will still be taxable.
Other Taxable Exclusions
These include certain gifts to spouses, gifts to political organizations, and gifts to qualified charitable distributions.
Bottom line: Whichever method you choose will depend entirely on how much control you wish to maintain over the funds, why you want it to be distributed, and the full amount you wish to give.
Creating a strategic wealth transfer plan with a qualified advisor who understands tax implications thoroughly will help alleviate stress and prevent potential family conflict after your death. At Storen Financial, we present the full picture when navigating the details of wealth transfer, always emphasizing what plans will be the most beneficial for you as well as implementing a customized tax-saving strategy that fits your unique situation. Ultimately, our goal is for you to feel confident knowing you’ve set your loved ones up for success.
Have questions? Or interested in a consultation? Click here to contact us now. Or click here to learn more about our Financial Planning and Investment services.
Want to learn more?
Here are a few more resources to help answer your questions…
4 Tax-Smart Ways to Share the Wealth with Kids – Kiplinger
New rules make IRAs less useful for transferring wealth: Ed Slott – Investment News
Top 7 Tax Mistakes Made In Planning A Wealth Transfer – Forbes.com
Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.
Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.
Blog by Greg Storen, MBA – President, Advisory Services Director
Learn more about Greg and the rest of the Storen Financial team here.