How to Transfer Wealth to the Next Generation

June 14, 2022

By The Welch Group

One of the goals we have as parents is to leave a lasting legacy for the next generation. Common ways we do this are through our family recipes, heirlooms, and words of wisdom, but another important way is by protecting assets. But how can you ensure you’re leaving the most you can for your family? How can you keep Uncle Sam from taking a large portion of your hard-earned wealth?

It’s a complicated process, but there are ways to keep it simple while leaving a legacy you can be proud of. Below, we explore ways to transfer wealth to the next generation.

Make Direct Payments

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.

Give Annual Gifts

You could also decide to gift some of your assets to your loved ones. Giving gifts helps you reduce the taxed portion of your estate, and you can gift up to $16,000 (1) per year to a loved one before any gift taxes are incurred. If you are splitting the gift with your spouse, you can give up to $32,000 combined. 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 $16,000 (or $32,000 if gift-splitting), 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 2022, the current lifetime exclusion is $12.06 million for individuals and $24.12 million for couples. (2) You will be required to file a gift tax form for any amounts that exceed the annual gifting limits of $16,000 individually or $32,000 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 an individual can gift up to $80,000 and a married couple could gift up to $160,000, without incurring gift taxes! (3) The beneficiary can then withdraw the funds and the investment growth, tax-free to pay for qualified education expenses.

Irrevocable Trusts

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.

Consult With a Wealth Advisor

At The Welch Group, we have ample experience in managing family legacies and estate planning, and we would love to help you leave a lasting legacy. Schedule an introductory phone call by reaching out to us at 205-879-5001.

About The Welch Group

The Welch Group is a fee-only, employee-owned wealth management firm committed to enriching the lives of their clients. Founded in 1984, The Welch Group helped pioneer the fee-only financial planning and investment management movement and has continued to put the needs of clients first ever since. Offering wealth management and family office services to retirees and young professionals, The Welch Group team strives to simplify financial management and help clients secure their financial future so they can focus on what matters most. Our personalized and comprehensive approach helps clients plan for their goals, needs, and concerns, including estate planning, cash flow, charitable and tax planning, and retirement strategies.

As financial advocates, the financial advising team is made up of educated, experienced, and dedicated professionals, including Certified Public Accountants, a Juris Doctorate (JD), individuals with MBA degrees, and CERTIFIED FINANCIAL PLANNER™, Accredited Estate Planner®, and Chartered Financial Analyst® professionals. The Welch Group is passionate about giving back, creating positive ripple effects in our community by supporting local charitable organizations through The Welch Group Foundation. To learn more about what we do and how we can help, explore our website and schedule a complimentary consultation.

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(1) https://smartasset.com/retirement/gift-tax-limits

(2) https://smartasset.com/retirement/lifetime-gift-tax-exemption

(3) https://www.investopedia.com/articles/personal-finance/010616/529-plan-contribution-limits-2016.asp

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