Leaving An Inheritance: Exploring Some Ways You Can Pass On Wealth
Exploring inheritance limits, inheritance strategies and more tactics to leave Wealth to your kids
🚀 What’s happening: According to recent statistics, baby boomers (those that are born between 1946 and 1964), are the wealthiest generation on the planet with total assets of $76.1 Trillion. Generation X (1965-1980) has $46 trillion, the silent generation (1928-1945) has about $19 trillion, and millennials (1981-1996) have about $13 trillion.
But no matter what generation you fall under, we all face the question as parents of planning to leave some of our wealth to our kids when we are gone.
Some parents feel that they shouldn’t leave anything, some feel that they should leave a little, and some think about leaving as much as they can. Where ever you are on that spectrum of thinking is absolutely fine (it’s your choice, after all), we just want help you explore some options and ways to do it.
And on that note, without further ado, lets explore just a few options starting from least expensive to most (caveat: some of the options below are dependent on what you choose within them which may change their cost ranking).
Gifting Assets: A Present for the Future
Strategic Gifting: Gifting assets during your lifetime can be a powerful strategy for reducing the size of your taxable estate and requires no outlay of cash now— other than the assets or money that you decide to gift. This can be as little as you want each year.
You can just give your kids or grandkids (or another family member) cash that they can deposit into an investment account of their choosing (or set up accounts for them like a 529- more here). Over time this can be a great way to help set up the younger generation for when you are gone.
One thing to be aware of is how much you decide to give each year can potentially trigger what is called a “gift tax” and cause you to need to file a gift tax return.
For 2024, the annual gift tax limit is $18,000. (That's up $1,000 from last year's limit since the gift tax is one of many tax amounts adjusted annually for inflation). For married couples, the combined 2024 limit is $36,000 meaning that you and your spouse could give a child up to $36,000 without triggering a tax (More here).
Pros: Powerful strategy for reducing your taxable estate and annual exclusion gifts are tax-free as long as you don’t give over the limit.
Cons: There is a limit on the amount (up to $18,000 for an individual and $36,000 for a married couple). Also, it will require some planning… be sure that it won’t limit your financial flexibility should you fall on hard times.
Brokerage or Retirement Accounts: Deferring Income Wisely
Brokerage or Tax-Deferred Retirement Accounts: Brokerage or tax-deferred retirement accounts can be another way to save and pass wealth to your kids. There are many considerations for both, but they can be broken down as follows:
Tax considerations
Distribution considerations
If you have a brokerage account, make sure you name a beneficiary. If your kids are over 18, you will need to name them as beneficiaries to the account (if they are minors, you will have to name someone else you trust). Also, ask your broker who holds your account about how this account will be taxed when it is passed on.
There are many occasions where your cost basis will get a “step up” when the account is passed on to your kids.
What that means simply is that if you bought a stock for $100 and when you die it is at $1,000, your kids will inherit your account as if they bought the stock at $1,000 (saving them from having to pay taxes on your $900 gain). It is important that you ask your account holder about this provision.
By utilizing tax-deferred retirement accounts, such as 401(k)s or IRAs, you can also defer income and potentially pass on these assets to your children with tax advantages.
Here is a simple guide to IRAs and 401ks as well as contribution limits.
Pros: Deferring income with potential tax advantages and tax-free growth in accounts like a Roth IRAs. Your children may also get to avoid taxes by receiving a step up.
Cons: Withdrawal restrictions and penalties may apply depending on when you die. And there may be added tax implications on distributions (talk to your broker).
Life Insurance: Beyond Financial Protection
Strategic Life Insurance Planning: Life insurance serves not only as financial protection, but also as a tool for passing on wealth (if you are debating whether or not you need life insurance or how much you might need we discuss this here).
It can be a great option for many families and typically comes with a much lower price tag up front than setting up a trust or a more complex legal structure (discussed below). There are many types of life insurance policies and they usually come in term (covers you for a period of time) or whole life (like it sounds) formats.
There are others… but these are the basics.
Most policies are tax free, so dispersants will go to the beneficiaries you name and can come with premium costs starting at just $10-$20 per month. You will have to name your beneficiaries, and similar to the above, if you kids are under 18 you will like have to appoint someone you trust to manage it for them until they turn of age.
Pros: Provides financial protection in case of something happening to you or your family while also serving as a tool for passing on wealth.
Cons: Premium costs may be high depending on what plan you choose and lack of premium payments can cause a forfeit of benefits.
Trusts: A Blueprint for Control and Flexibility
Setting up a trust provides a strategic avenue for passing on wealth to your children by ensuring a seamless transfer of assets, avoiding probate delays, and allowing for controlled and flexible distribution in accordance with the grantor's intentions.
The cost of a trust will likely fall between $1k-$3k+… but without one, there is a good chance your loved ones may spend more than this amount dealing with probate court (this can be avoided in the options above in most cases if they are named as clear beneficiaries upon your death).
Let’s explore a few types in more detail.
Revocable Living Trusts: These trusts provide a seamless transfer of assets to your children without the delays and costs associated with probate which can add up to thousands (some more detailed info here on living trusts, Wills, and Probate).
Pros: The pros of a living trust as we see it are the seamless transfer of assets without probate delays and flexibility to make changes during the grantor's lifetime.
Cons: The cons are the types of assets it covers (may not cover everything) and assets included in the trust are still subject to estate taxes (in 2024, unless you have an estate worth over $13.6 million your family will not trigger the estate tax).
Irrevocable Trusts: While less flexible, irrevocable trusts are another type of trust that offers enhanced asset protection and potential tax benefits (more detail here).
Pros: Enhanced asset protection and potential tax benefits.
Cons: Less flexibility; changes are challenging. Assets generally cannot be retrieved once transferred.
Spendthrift Trusts: For parents concerned about their children's spending habits, a spendthrift trust allows you to control the distribution of assets over time (more detail on a Spendthrift Trust here).
Pros: Control over the distribution of assets to limit spending and protection against creditors and legal judgments.
Cons: Limited flexibility for beneficiaries and complex legal structures for this may require professional assistance.
Family Entities: Collaborative Wealth Management
Family Limited Partnerships (FLPs) and Limited Liability Companies (LLCs): These entities entail basically creating a legal entity among family members. It provides a very structured approach to managing family assets to facilitate the smooth transfer of wealth but does carry a bit more complexity (more detail here). Overall cost to set one up can also be quite expensive running in the $10,000 to $20,000 range.
Pros: Structured approach to managing family assets. This also facilitates smooth wealth transfer with more complexity.
Cons: Requires ongoing maintenance and compliance. Complexity may lead to family disputes and it’s not cheap to set one up.
Final Thoughts…
There you have it, some options to keep in mind as you think about passing on something to your kids.
Keep in mind that whatever you decide, seeking professional advice from financial planners, estate planning attorneys, and tax professionals is a very important step in this process.
Their expertise will ensure that your chosen strategies align seamlessly with your unique circumstances, providing a robust and comprehensive plan for leaving a legacy for your children.
Lastly, if you are confused about what all these people in the financial industry actually do (their titles do get confusing), we discuss what different titles actually mean more here.
Good luck and we are always here for questions!
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