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!


This material is distributed for informational purposes only. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.

Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional or licensed insurance professional regarding your specific legal or tax situation, or insurance needs.

Companies mentioned in this article are not necessarily held in client portfolios and our references to them should not be viewed as a recommendation to buy, sell or hold any of them.

The Planner You Can Talk To is a trademark of Adviser Investments, LLC, registration pending.

© 2022 Adviser Investments, LLC. All Rights Reserved.