Estate Planning: Passing Wealth to Heirs | Adviser Investments

Advanced Estate Planning: Passing Money to Heirs

Passing on wealth to family members and heirs is one of the primary objectives of the estate planning strategies we create for clients. And thanks to today’s tax code, there’s never been a more favorable time to do so.

At present, you can give up to $16,000 each year ($32,000 if you’re married) to as many people as you’d like during your life. Upon death, you can leave up to $12.06 million ($24.12 million for married couples) in cash, securities or other assets to heirs without incurring any federal estate or gift tax. However, these particular tax exemptions are set to expire at the end of 2025 and could change even sooner as part of a budget deal or infrastructure package passed by Congress.

How else can you maximize the amount your loved ones receive while taking taxes into account? Here are four ways trusts can help.

  1. Roth IRA conversions. The SECURE Act eliminated the “stretch IRA” provision that allowed non-spouse IRA beneficiaries and trusts to stretch required minimum distributions (RMDs) out over the life of an heir. Now those assets must be distributed to beneficiaries at ordinary income rates within 10 years of the original owner’s death. And when trusts are the beneficiaries, the tax rate is even higher than that of ordinary income. One simple solution: Keep the trust as beneficiary but convert the IRA to a Roth—thus making future distributions tax-free.
  2. Irrevocable life insurance trusts. An irrevocable life insurance trust (ILIT) is another tax-efficient way to pass significant assets down to your heirs. The ILIT owns a life insurance policy on the grantor’s life. When the grantor passes, the proceeds fund the trust and are distributed to beneficiaries according to the ILIT’s terms. Life insurance proceeds not held in an ILIT are taxed as part of the insured’s estate. With an ILIT, those proceeds are excluded from the insured’s estate, reducing the estate tax burden.
  3. Intentional grantor trusts. These irrevocable trusts are funded with your assets during your lifetime. Normally such a trust would employ estate, gift and generation-skipping tax (GST) exemptions but still owe income taxes on the growth of the assets. However, if structured properly, an intentional grantor trust can maintain the gift and GST exclusion while enabling the grantor to pay income taxes on the growth of the assets while they are living. This allows the trust to grow without triggering high taxes when you pass, leaving a larger pool of assets for your heirs.
  4. Grantor retained annuity trusts. Interest rates (although on the rise) remain historically low. This makes grantor retained annuity trusts (GRATs) worth a look. Basically, GRATs are funded by the grantor in exchange for a stream of annuity payments, including the original deposit, over a specified period and at a predetermined interest rate. After the final annuity payment occurs, whatever remains in the trust is transferred to the beneficiary. If interest rates remain relatively low, many asset types and classes should appreciate faster than the distribution rate. That growth is then passed on to the trust’s beneficiaries free from gift and estate taxes. However, there’s a catch: If the grantor dies before the term of the trust ends, the beneficiary gets nothing and the trust is included in their estate.

These estate-planning strategies provide some smart options, but they can be complex and expensive to set up. Talk to us before pursuing any of these options. We are happy to help!

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