Wealth Transfer Strategies

Sep 21, 2021

Benjamin Franklin once penned, the only certainties in this world are death and taxes. While the two entities often stand independent of one another, the two are habitually intertwined in the financial planning realm. The impact taxes can have on your estate when you pass, if not addressed appropriately, can wreak havoc on your estate. So, while we can't speak for sure on how the tax landscape will look in the coming years, we have a good sense that changes are on the horizon.

The current lifetime gifting and estate tax exemption amount is $11.7 million per person (2021), meaning estates valued below this threshold would not be subject to estate taxes. The Biden administration, though, has proposed lowering this amount to $3.5 million per person. Even if no such proposal is enacted, these levels will revert to pre-Tax Cut & Jobs Act (TCJA) levels of $5 million per person in 2026. Subsequently, the result is that your estate will be subject to taxation of up to 40% on amounts that exceed these thresholds, whatever they 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 in which to reduce your taxable estate. For example, you can donate to charities, gift to family members, or incorporate estate reduction strategies through the utilization of 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 for gifts up to $15,000 per donor per beneficiary annually without tapping into the lifetime exemption amount. Thus, if you are married, you and your spouse can gift $30,000 to each child or grandchild, and neither of your estate exemption amounts will be impacted. Another route to consider is that of schooling and medical expenses. Payments for qualified tuition and medical expenses can be made without tapping into the lifetime exemption as long as those payments are made directly to the school or health care provider.

Charitably Inclined Approaches

A more philanthropic method to lowering your estate is charitable giving, which can be accomplished in numerous ways. One approach is by gifting appreciated securities. This entails giving stock that has increased substantially in value to a charity.. This allows you to remove the value of an asset from your estate, benefit a charity, and avoid capital gains tax. For example, if you had stock that you paid $25,000 for which had grown to $100,000, you remove $100,000 from your estate, avoid capital gains 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 assets such as an IRA or 401(K) and have reached the age where you are required to take required minimum distributions (RMDs), consider making Qualified Charitable Distributions (QCDs) directly to charities. The IRS allows for distribution of up to $100,000 to be made annually to a charitable entity(s) tax-free. Along those lines, another strategy involves naming a charity as a beneficiary of a retirement plan, either in full or partially. Then, at the time of your passing, the assets within the retirement plan pass to the charity of your choosing. This removes the fair-market value (FMV) from your taxable estate.

Another consideration could be given to Charitable Remainder Trusts (CRTs). Charitable remainder trusts allow the donor to make irrevocable contributions (and receive a partial tax deduction) while receiving income or principal payments over time. The donation of the assets subsequently removes them from your gross estate. At the end of the selected term or the passing of the last income beneficiary recipient, all remaining assets will pass to the chosen charity(s).

Not-So Common Strategies

If your home comprises a large amount of your estate, you might consider a Qualified Personal Residence Trust (QPRT). This irrevocable trust involves transferring ownership of your residence into trust to avoid future appreciation being included in your estate. The value of your home is discounted using a specified formula, and that amount is used for gift tax purposes. You remain in the house, and at the end of a predetermined period of time, ownership of the home is transferred, and you would begin paying rent to the trust's beneficiaries. The one drawback to this strategy is that if the donor/owner passes prior to the end of the trust period, the property will be pulled back into the estate.

For estates that consist of assets expected to increase substantially in value over time, a Grantor Retained Annuity Trust (GRAT) may be a viable option. A GRAT allows for 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 and a rate of return (determined by the IRS) over a specified time. The goal is to set the value of the accumulated annuity payments equal to the original 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 remain in the trust to pass free of gift tax to the selected beneficiaries. Like the QPRT, however, if you die before the term ends, the assets in the trust become part of the taxable estate.


The strategies above are just a few select options from which to choose when looking to lower the value of your estate while at the same time leaving a lasting legacy. This is by no means an all-encompassing list. 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.

While taxes may be a certainty in this life, the impact they can have on one's estate is anything but!

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