Legacy Planning For Generational Wealth Transfers

Posted Sep 18, 2020


Legacy planning can be essential to help manage the loss of assets from one generation to the next. Investigating strategies for generational wealth transfers is the first step in planning the protection of your wealth for future generations. If your goal is to protect your bequests, while simultaneously affording your heirs the freedom to manage their investment property according to their individual preferences, you need to plan. Planning now can provide your heirs with the flexibility to form their investment strategies while you can still offer guidance and simultaneously reap the advantage of avoiding unnecessary estate taxes. Since the term legacy planning implies the inclusion of value-driven elements, it is often considered to be broader than estate planning.

You may want to consider some of these options:

Gifts of stock that currently demonstrate attractive potential for appreciation create excellent avenues for wealth transfers, due to the annual and lifetime exclusions available from gift taxes (the lifetime exemption for an individual of $11.58 million is due to expire after 2025 and revert to half that amount). The growth in asset value is effectively removed from your estate, enabling future potential to accrue to the recipient with a lower tax base.

GRATS (Grantor Retained Annuity Trusts) are highly useful to help minimize tax leakage. By creating an irrevocable trust for a specific period, you (the grantor) can pass wealth to your beneficiaries while maintaining entitlement to the return on the assets in the trust. The IRS sets the rate of return, referred to as the Section 7520 Interest Rate. It is established at 120 percent of the applicable federal midterm rate.

IDGTs (Intentionally Defective Grantor Trusts) allow you to freeze the value of the assets you transfer to a trust while you retain the obligation for the taxes on the income earned by the trust. The trust then can grow without owing taxes, so this is helpful when stocks put into the trust are low to start. Unlike GRATs, intended for transferring wealth to the immediate next generation, the IDGT can be used to skip one. 

CLATs (Charitable Lead Annuity Trusts) is a dual or split-interest trust that provides benefit to a charitable organization during the term of the trust and passes remaining assets to your beneficiaries at the end of the trust period. Like GRATs, the remaining value depends on the assets' performance in the trusts during the term. With this option, you can support your philanthropic goals and your estate planning with the same tool.  

Strategic Beneficiary Selection. While traditional IRA to Roth conversions have received notable attention recently, if you are planning to bequeath some assets to a charity and others to heirs, one option may be to forgo the conversion (there are disadvantages as well as benefits to the practice). Instead, choose to strategically leave the IRA to the charity, and direct the cash flows or property to the family. Since the charity is exempt from the taxable distribution consequences, it receives the full value of the gift, while the family would have to pay taxes on the distributions.

As mentioned, always talk to your investment and tax advisor about specifics, but these ideas may help combine the goals of tax management, philanthropic support, and family wealth protection.This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.

IRS Circular 230

To ensure compliance with requirements imposed by the IRS under Circular 230, we inform you that any U.S. Federal tax advice contained in this communication, unless otherwise specifically stated, was not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing, or recommending to another party any matters addressed herein.

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