Cypress Wealth Services
September 2023
In the years ahead, an estimated $68 trillion is anticipated to transfer from baby boomers to their beneficiaries. This highlights the importance of consulting a financial advisor to guide you through a seamless “great wealth transfer” for both you and your loved ones. Taking a proactive stance in this process may increase the likelihood that you can realize your goals, such as tax reduction, charitable giving, and more.
While the act of gifting wealth may appear complicated, there are many ways to streamline the passing of assets to the next generation. Consider these steps to instill the confidence that you’ll create a legacy that fills you with pride.
Simply making direct payments for your children or grandchildren’s expenses is one of the easiest ways to transfer your wealth without the hassle of taxes. Many institutions will allow you to pay your grandchildren’s tuition directly from your account. You can also conveniently take care of other important expenses, such as medical expenses, by automating payments to their healthcare provider.
When you make this sort of payment to an organization or institution, it helps you bypass the burden of gift tax, which can be a hefty price to pay on your assets. However, if you gift the money directly to the recipient, you might still be subject to gift taxes.
You could also decide to gift some of your assets to your loved ones. Giving gifts helps you reduce the taxable portion of your estate, and you can gift up to $17,000 for 2023 to a loved one before any gift taxes are incurred. If you are splitting the gift with your spouse, you can give up to $34,000 combined for 2023. To effectively transfer wealth to the next generation, you can ensure that you give the maximum amount every year.
It’s worth noting that once you gift more than these limits, the excess amount spills into the “lifetime exclusion bucket.” You must use this entire amount before the IRS requires you to pay gift tax. For 2023, the current lifetime exclusions are $12.92 million and $25.84 million for individuals and married couples, respectively. You will be required to file a gift tax form for any amounts that exceed the annual gifting limits, individually or jointly. This is how the IRS will track your lifetime exclusion amount.
Another great way to transfer wealth to your children and grandchildren is through the use of 529 college savings plans. There is a special provision that allows donors to contribute 5 years’ worth of gifts as a lump sum. This means for 2023, an individual can gift up to $85,000 and a married couple could gift up to $170,000 without incurring gift taxes! The beneficiary can then withdraw the funds and the investment growth tax-free to pay for qualified education expenses.
Creating a trust is another way to transfer wealth to the next generation. To oversee the use of your assets, you can create a trust with specific guidelines for passing your wealth to beneficiaries.
When your estate is significant, an irrevocable trust comes in quite handy. You transfer all your assets from your estate to your trust, thereby bypassing estate tax. Additionally, when you accrue income on the assets you hold in your trust, you are not personally responsible for paying taxes since the trust is considered a separate entity. As such, the trust will be taxed directly on any retained income and beneficiaries will be taxed on any distributions of income. This is an effective wealth transfer strategy since beneficiaries are typically in lower tax brackets.
It’s also important to note that irrevocable trusts are permanently binding; you cannot change any of the terms nor beneficiaries. Once you have handed over your wealth to the trustees, they manage and transfer it according to your specific wishes.
I’m noticing more and more that it’s not as much about leaving money to your children as it is enjoying the fruits of your lifelong labors through quality time with them while you’re still alive. Experiences shared as a family will mean much more to your kids than a fancy car on their 16th birthday. Rather than safeguarding your wealth to be left after you’re gone, consider buying a vacation home where everyone can gather or taking your whole family on that dream trip to Paris. These experiences will produce lifelong memories that are likely more impactful than leaving them a larger inheritance.
At Cypress Wealth Services, our team is dedicated to delivering purpose-driven guidance that aligns with the principles of our company, enabling our clients to enjoy life to the fullest. We’re eager to connect with you, explore your goals, and help you create a lasting legacy for your loved ones. Schedule a commitment-free initial phone call at 866.888.6563 or contact one of our offices today to begin your journey.
Cypress Wealth Services is an independent RIA firm providing financial planning and investment management to high-net-worth individuals, families, business owners, and institutions. Cypress Wealth Services comprises professionals with diverse backgrounds and extensive experience and qualifications. Cypress Wealth Services serves a broad range of client needs using their knowledge and expertise to act as a foundation for their client service process. The firm uses The Second Growth, which focuses on efficiently protecting, growing, and transferring the wealth and legacy a person has already built to their loved ones. With financial advisors in California, Alaska, Arizona, and Georgia, the firm serves clients across the country with Wealth Management Services, Fiduciary Services, 401(k) Design and Management, Investment Reporting Services, Financial and Retirement Planning, and more. For more information, visit www.CypressWS.com or call 760.834.7250.
*Cypress Wealth Services does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstances.
