Wealth Transfer Strategies

Benjamin Franklin famously wrote, “In this world, nothing can be said to be certain except death and taxes." While the two entities often stand independent of one another, in the financial planning realm, the two are habitually intertwined. The impact taxes can have on your estate when you pass, if not addressed appropriately, can wreak havoc on your estate.

The current lifetime gifting and estate tax exemption amount is $13.99 million per person (2025), meaning estates valued below this threshold would not be subject to estate taxes at one's passing. The passing of the Tax Cuts and Jobs Act (TCJA) substantially increased the exemption limits in 2018, although these increases were temporary.

If Congress fails to act in some capacity, these higher limits will revert at the end of 2025 to pre-TCJA limits (plus inflation) of approximately $7 million per person. Subsequently, the result is that your estate will be subject to taxation of up to 40% on amounts that exceed these thresholds, whatever the threshold may be at your passing.

Invariably, the end goal is to lower the overall value of your estate to limit your estate tax liability. There are several ways to reduce your taxable estate. You can donate to charities, give a gift to family members, or use specific trusts. Below are just a few select strategies that can help from a tax perspective and leave a lasting legacy as you see fit.

Common Gifting Strategies

Making outright gifts is the most common way to reduce your estate. The IRS allows gifts up to $19,000 per donor per beneficiary annually without tapping into the lifetime exemption amount. Thus, if you are married, you and your spouse can gift $38,000 to each child or grandchild, and neither of your estate exemption amounts will be impacted.

Another route to consider is schooling and medical expenses. Payments for qualified tuition and medical expenses can be made without tapping into the lifetime exemption as long as payments are made directly to the school or health care provider.

Charitably Inclined Approaches

Charitable giving is a more philanthropic method of lowering one's estate. It can be accomplished in numerous ways. One approach is to gift appreciated securities. This entails giving individual stocks, mutual fund units, or other assets that have increased substantially in value to a charity. This allows you to remove the value of an asset from your estate and avoid capital gains tax while providing funds to your favorite charity.

For example, if you donate stock that you paid $25,000 for and is now worth $100,000, you remove $100,000 from your estate, avoid capital gains tax on $75,000 of growth (if you had sold), and the charity can sell the stock immediately and avoid taxes altogether.

If you have qualified retirement assets such as an IRA or 401(K) and have reached the age where you must take required minimum distributions (RMDs), consider making Qualified Charitable Distributions (QCDs) directly to charity(ies). The IRS allows for a tax-free distribution of up to $108,000 to be made annually to charity. The QCD amount is also counted as part or all of your RMD for that year.

Along those lines, another strategy involves naming a charity(ies) as a beneficiary of a retirement plan, either in full or partially. At the time of your passing, the assets within the retirement plan pass to the charity(ies) of your choosing, and the fair-market-value (FMV) is removed from your taxable estate.

Another consideration could be given to Charitable Remainder Trusts (CRTs). Charitable remainder trusts allow the donor to make irrevocable contributions to the trust (and receive a partial tax deduction) while receiving income or principal payments over a structured period.

The donation of the assets to the CRT subsequently removes them from your gross estate. At the end of the selected term or at the passing of the last income beneficiary, all remaining assets will pass to the selected charity(ies).

Not-So Common Strategies

For estates consisting of assets expected to increase in value over time, a Grantor-Retained Annuity Trust (GRAT) or a Spouse Lifetime Access Trust (SLAT) may be viable options.

A GRAT allows the asset(s) to be transferred irrevocably into a trust while retaining the right to receive annuity payments based on the value of the assets that will earn a rate of return (determined by the IRS) over a specified period. The goal is to set the value of the annuity payments equal to the value of the property funding the GRAT to ultimately "zero" it out.

This allows for a "zero-value" gift and does not detract from your lifetime exemption amount. Once that term has lapsed, assets remaining in the trust pass to the selected beneficiaries, gift tax-free.

A SLAT, similar to the GRAT, allows individually owned assets to be irrevocably transferred into trust from one spouse to the other. While the transferring spouse no longer has control and cannot receive any direct benefit, the receiving spouse (through authority granted to the trustee) can receive distributions from the trust.

In this scenario, the value of the assets will count against the gifting spouse's lifetime exemption; however, the SLAT assets and all future appreciation during the beneficiary spouse's lifetime will pass on to subsequent beneficiaries without incurring any gift tax.

Summary

The strategies above are just a few options for lowering the value of your estate while leaving a lasting legacy. This is not an all-encompassing list, and any consideration given to any wealth transfer approach should be accompanied by a comprehensive conversation with your financial advisor and, subsequently, a licensed estate planning attorney.

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