Many people are in a position to leave behind powerful legacies. However, this opportunity can be lost if the correct steps have not been taken in advance. Indeed, we have all heard stories about lost fortunes.
Legacy planning is the key to wealth preservation. If you work with a licensed wealth counselor to implement a sound financial framework, you can in fact pave the way for succeeding generations of your family.
Let’s look at some of the challenges that exist and touch upon the solutions that can be implemented.
Federal Transfer Taxes
The impact of the federal estate tax is perhaps the most important thing to consider when you are engaged in the process of legacy wealth planning.
At the current time, the maximum rate of the federal estate tax is 40 percent. The credit or exclusion sits at $5.45 million. This is the amount that you can pass to your heirs tax-free before the death levy becomes a factor.
It should be noted that this exclusion applies to asset transfers to people other than your spouse. There is an unlimited marital deduction. If you are married to an American citizen, you can transfer any amount of money to your spouse free of the estate tax.
The estate tax exclusion is portable. If you predecease your spouse, he or she could use your exclusion as well as his or her own.
In addition to the estate tax, there is also a gift tax in the United States. You can’t just give away assets while you are living in an effort to avoid the federal estate tax.
This was possible for several years after the estate tax was first enacted in 1916. However, the loophole was closed for good in 1932.
The estate tax and the gift tax are unified. The $5.45 million exclusion extends to taxable gifts that you give coupled with the value of your estate. As a result, if you give away $5.45 million while you are living using this exclusion, all of your estate would be subject to the federal estate tax.
In addition to the unified gift/estate tax exclusion there is an annual per person gift tax exclusion. Under the tax code, you may give gifts totaling as much as $14,000 to any number of individuals in a given year free of the gift tax. To be clear, when you give gifts using this exclusion, they do not reduce the amount of your available unified exclusion.
Here in the state of Maryland where we practice law, there is also a state-level estate tax, and the exclusion is just $2 million.
Tax Efficiency Strategies
There are a number of different things that you can do to mitigate your estate tax exposure. One possible solution would be the creation of a generation-skipping trust.
A single imposition of the federal estate tax can have an enormous impact on your financial legacy. However, the estate tax can be imposed over multiple generations, and the same resources could be taxed multiple times.
With a generation-skipping trust, you name your grandchildren as the beneficiaries rather than your children. Though they are not the beneficiaries, your children can receive monetary distributions from the trust. They can also utilize property that has been conveyed into the trust.
Through a special power of appointment, the children may actually be able to direct some of the trust’s actions.
The children can in fact benefit from the assets that have been conveyed into the trust. However, no transfer taxes will be levied because the children never directly own the assets.
Once the children die, the grandchildren inherit the resources that comprise the trust. Though there will be a tax on the transfer, two generations benefited, but there was only one round of taxation.
This is one of numerous different things that you can do to arrange for asset transfers in a tax efficient manner.
Family Heirlooms and Personal Memoirs
When you are crafting your legacy you may want to consider the value of family heirlooms. These objects are going to have monetary value, but that may not be the point.
Your legacy can involve educating younger family members about the past. There are stories behind these heirlooms, and you can make sure that they live on by sharing them when you are planning your estate.
Oral storytelling can be part of the plan. In addition, you may want to take the time to record your personal memoirs. People are often very interested in their ancestry, and your link in the chain can be fully understood if you take the time to share your experiences in writing.
Setting aside resources for the benefit of charitable causes can also be part of a legacy wealth plan. There are personal rewards on an emotional level, and there can also be tax benefits realized through acts of charitable giving.
Attend a Free Seminar
If you would like to learn more about legacy planning, visit our seminar schedule page to register for the session that is convenient for you.