Financial Planning

Estate Planning Series Part 5: Non Trust Wealth Transfer Planning

Welcome back for part 5 of my Estate Planning Series. If you have not, make sure to check out:

Those will help get you up to speed for this blog post. So far a lot of what we have talked about is moving money out of your estate to save on various taxes. However, there are ways to give money and help your family without utilizing trusts and that is what we are going to go through today.

Let’s get right into some of the best ways to do just that.

1. Direct Gifts and Using Gift Limits

Direct gifts are a great way to give money to others in your family. And when you do this correctly, you can do it without touching the gift exemption amount. The 2023 gift tax limit is $17,000 per person. This means you could give $17,000 from each spouse to each kid and even their kids and so on without having to report the gift and utilize some of lifetime gift exemption.

This is super powerful for my high net worth people out there. When you have a lot of extra money, gifting now, watching your family benefit from this, and ultimately saving on gift taxes is a huge win. It is something many should be considering.

You also can choose to give more than that per year, but the amount over the yearly gift tax limit would start reducing how much is left of the total lifetime exemption. A huge myth I hear from people is that they think this amount is taxable. It’s not taxable, it just needs to be reported.

2. Paying For College/Healthcare Expenses

Families can choose to pay for college or healthcare expenses directly and those do not count as gifts. Most ways of paying for things/giving money to your children will count as gifts, but not these two categories. This is a great way to give even more without utilizing some of the lifetime gift exemption.

3. 529 Plans

For those that do not know, 529 plans are specific education accounts that can be used for you or your family members. In some states you get a tax deduction or credit, and in others you do not. However, you also get tax deferred growth and tax free use on qualified educational costs. It’s a really great tool. And now, when open for 15 years, whatever is leftover (up to $35,000) can be converted to a Roth IRA tax free for the beneficiary. Making it an even more powerful tool.

Note: You can only convert per year up to this annual allowed amount which is currently $6,500.

In general, you can contribute $17,000 per year, per spouse, per child without it counting towards the lifetime exemption amount. But… there is a unique rule with 529 plans where you can use 5 years of exclusions at once meaning you could do $85,000 per tax payer or $170,000 for a married couple in a single year.

This is a great way to help prepare for college and give even more to your children.

4. Owning The Home Where Your Beneficiary Lives

Owning the home where your beneficiary lives can be a great way provide financial support to them.

You can provide stable housing, eliminate the need for them to pay a mortgage, etc. from utilizing this strategy. However, this does not mean they get entirely free housing. If the market price for rent is above $17k (you should know why $17k after all the other parts) then the beneficiaries would have the pay that amount.

Then upon death of the parents, they could pass this house on to their kids which is not a taxable gift (unless estate is above the exemption amount) and they get a step-up in cost basis.

5. Intra Family Loans

Rather than gifting money you can provide loans to your family members. They are a great way to help your kids, keep money in the family, and set them up well. But you can’t just give them money, pay a 0% interest rate, and call it a day. You actually have to setup a formal agreement, outline the term, include the rate, repayment schedule, collateral, etc.

And to pick the rates, you can not just pick them out of thin air. You have to follow the AFR rates which you can check out more about here. This chart below also shows the going rates for these type loans.

As you can see, way below current rates you would get at any bank making intrafamily loans a great way to setup your kids well when you have a lot of extra money.

6. Investments and Business Ventures

Wealth families can invest in businesses their family members start. This provides capital, helps the business grow, and ultimately helps out the family members a ton. The great part, this would not count towards gifting exemptions at all as it is in an investment in the business.

As you can see, there are many great ways to pass wealth onto your family members while alive without utilizing trusts. But the truth is that most wealthy families do a combination of many of these strategies. It’s not a one or the other approach.

Thanks for reading! I hope you found this valuable.

Disclaimer: None of this should be seen as advice. This is all for informational purposes. Consult your legal, tax , and financial team before making any changes to your financial plan.

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