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Accumulation and Transfer of Wealth
In order to build lasting wealth over multiple generations, careful planning and patience are required. Without specific plans to create and transfer your legacy, statistically, 70 percent of wealthy families will lose that wealth in the subsequent generation, and 90 percent will lose it in the following generation. The sooner you begin implementing the principles to build generational wealth and transfer it effectively, the greater the likelihood of success.
Money, investments, life insurance, real estate, business, valuable collections, or anything else with monetary value represents generational wealth. Subsequent generations receiving your legacy will experience financial advantages to create a better life sooner and with less stress. Strategically saving money and preserving assets in a tax-advantaged way allows more wealth to accumulate in each generation.
Building and maintaining wealth requires understanding financial principles that not everyone chooses to learn. The correct mix of assets in an investment portfolio is crucial to creating wealth. It requires modifications in changing economic times. Your income level matters too. Developing multiple income streams can offset lower dollar valuation in high inflationary times. Earning smarter and finding passive income streams can build your wealth.
Creating a Legacy Strategy
An estate planning attorney can help you plan and accomplish your long-term objectives innovatively and pragmatically. Creating a financial vision for generational wealth early in life provides the most valuable component in the wealth-building equation: time. Oversight and timely investment changes can significantly affect how fast wealth grows.
Families who want to pass assets to the next generation should reduce their exposure to capital gains, gift, and estate taxes. Executing an efficient wealth transfer strategy requires understanding the rules that govern taxation and asset transfer, which an estate planning attorney provides.
In the US, two primary methods to transfer wealth are lifetime gifting and inheritance at death. Current law states individuals may transfer up to $12.92 million during their lifetime or at death without triggering estate or federal gift taxes, known as your lifetime exemption. This dollar amount is set to reduce significantly at the end of 2025 unless Congress changes the existing law.
Additionally, an individual may gift up to $17,000 annually to any person without incurring any estate or federal gift taxes. Known as the annual gift exclusion, it does not carry over, meaning it won’t accumulate year to year. For example, if you gift your child $25,000 in one year, the first $17,000 can apply to your annual exclusion amount, and the remaining $8,000 would use up a portion of your lifetime exemption amount.
Gifts over the annual exclusion made during your lifetime will reduce the amount you can exclude from the value of your estate at death. If you were to gift $2 million during your life, then at your death, the lifetime exemption amount decreases to $10.92 million for estate asset distribution. Any amount over this dollar figure is subject to a 40 percent federal estate tax unless it transfers to a spouse or charity. Transfers to spouses during life or at death receive an unlimited marital deduction. Assets that transfer to a qualified charity reduce the estate’s value in the estate tax liability calculation.
Generation-Skipping Transfer Tax
The generation-skipping transfer tax (GST) applies to gifts or bequests to grandchildren or great-grandchildren. Exemption amounts are the same for lifetime and estate tax ($12.92 million). However, there is a required 37 ½ year age gap between the gift giver (excluding spouses). These gifts also reduce your lifetime estate tax exemption.
Structuring GST in your estate can be very beneficial. However, it requires a thorough understanding of the tax laws, such as direct or indirect skips, and carefully crafted estate planning documents. Most people won’t encounter the need for the GST because of the current lifetime exemption high threshold, but post-2025, GST may become a more meaningful strategy for an increasing number of families.
Cost Basis Updates at Death
This very important update to stock asset valuation reflects the asset cost at the date of death. The original value of an asset may revise up or down. Inheritors can benefit when there is a stepped-up basis (increase in value), as capital gains tax won’t apply to any growth before the original owner’s death. In theory, the inheritor could immediately sell the asset, reaping the increase in value with little or no capital gains tax assessment.
This approach involves making a gift to an older family member. It allows a parent to take advantage of the current lifetime exemption and gift to older generations, avoiding the estate tax while still taking advantage of a step-up in cost basis. This strategy assumes the grandparent has not, or likely will not, use up their estate tax or GST exemption.
Once the gifting of assets is complete, there is no longer any control of the asset by the gifter. A grandparent might leave the asset to someone else, or the asset may become subject to a creditor of the grandparent. Upstream gifting may also affect a grandparent’s income taxes, Medicare premiums, or benefits eligibility, so careful planning is required for success.
Planning for Generational Wealth Transfer
Contemplate creating a family legacy plan outlining your family’s values, goals, and future vision. A multi-generation legacy plan can help ensure your wealth transfer strategy aligns with your family’s long-term objectives.
With clear objectives, you can begin developing a comprehensive strategy with your estate planning attorney. A strategy includes a will, trusts, and other necessary legal documents tailored to your needs.
Trusts can effectively transfer wealth to future generations while minimizing taxes and protecting your assets. A revocable living trust provides more flexibility, and an irrevocable trust helps manage, preserve, and distribute your assets more efficiently.
Plan for taxes as estate taxes can significantly burden generational wealth transfer. Some estate planning attorneys may be well-versed in tax law, or you may hire a tax advisor to consult with your attorney to develop a tax-efficient strategy according to federal and state tax laws.
Use gifting strategies to reduce your taxable estate by making annual gifts to your children and grandchildren.
Review and update your estate plans regularly to ensure your plan continues to meet your needs and reflects any changes in your circumstances or the law. Contact our attorneys to create an effective estate plan for generational wealth transfer that protects your assets, minimizes taxes, and provides for the multiple generations.
This article offers a summary of aspects of estate planning. It is not legal advice and does not create an attorney-client relationship. For assistance, please contact our Forty Fort office or call (570) 288-1800.