When people are planning their estates, they often come to the point where they have to decide how to distribute a lump sum of money.
The reason it’s an issue is, of course, taxes. While the federal inheritance tax has a fairly generous threshold at $13,610,000 for 2024, sometimes that amount is not enough. So what are some other creative, legal ways to avoid taxes when transferring wealth to your heirs?
Give It as a Gift
The threshold for taxing gifts is also pretty generous; a gift has to be over $18,000 to be taxed. The thing about gifting an inheritance is that there is a lifetime limit per person.
There’s a major caveat — or rather 50 major caveats — surrounding the details of the gift tax threshold. Amounts change from state to state, so you have to be cognizant of them every year. When I first started this business, the exemption amount was $10,000, now it’s up to $18,000. Keep in mind that a married couple can each gift $18,000 to a recipient for a total of $36,000 per year.
That’s a lot of money that you can give away tax free, and that money stays out of your estate, so your heirs aren’t paying estate taxes.
529 College Savings Accounts
529 plans are great and I highly recommend them after my recent experience with my grandchildren. 529s are education accounts, and come with their own set of tax benefits. In my family’s situation, my children have opened the 529s for my grandchildren, and I put the money directly into those 529 accounts. Every state has their own guidelines for funding 529s.. Some of the states even allow you to use that 529 money for private school tuition for elementary,middle school, and high school. Again, it really depends on your state..
Many of JHA’s clients have come to realize the benefits of using a trust to pass on their wealth — including certain tax savings. Trusts offer a lot of advantages, especially if you want to give a large gift and set a limit on it. An example of a permissible limit would be setting an age for the trust to be distributed at — commonly 21, 25 or 30.
Trusts offer protection against creditors, future creditors, lawsuits, divorce, all because the asset is really owned by the trust. A trust has a beneficiary and a trustee, with the trustee overseeing the assets within the trust.
If somebody’s using a FAFSA, the value of the trust will be factored in as an asset — in other words, a trust may negatively impact someone’s financial aid package.
JHA has experience working in all three of these settings, and we know people who can help you set it up. For more information, contact us.