Using Generational Wealth Transfer to Preserve Family Wealth
Financial and tax advisors have been anticipating “the great wealth transfer” for a long time. The oldest Baby Boomers are now in their late 70s and the youngest Baby Boomers are approaching retirement. The wealth that this generation spent their lives building will be transferred to their children, grandchildren and other family members over the next few decades. The era of generational wealth transfers has officially begun.
An unprecedented amount of wealth is going to be transferred in the coming years. Americans over 70 had nearly $38 trillion in wealth at the end of 2021, according to Federal Reserve data. A 2018 report from research and analytics firm Cerulli Associates projected that 45 million households would transfer an estimated $68 trillion in assets over the next 25 years.
If the projections are correct, that means that more than 45 million households are going to be calling their tax advisors for help with planning asset transfers over the coming decades. Or at least, wealthy families should be making those calls. Generational wealth transfers need to be carefully pre-planned in order to minimize taxes for both the giver (and/or their estate) and for the beneficiary, preserving as much wealth as possible.
Tragically, the pandemic has sped up asset transfer timelines in many families. COVID-19 has killed hundreds of thousands of Boomers in the U.S. alone so far, sending families scrambling to navigate estate taxes and probate issues that their loved ones did not plan for. Do not put off the important conversations with your tax planners until it is too late.
Generational Wealth Transfers During Life
Some people want to see their loved ones make use of an inheritance while they are still alive. Or a younger family member might have urgent financial needs that their older relative wants to help with. Whatever your motivations, be mindful of the tax considerations that may affect generational wealth transfers during life. They include:
Gift taxes: Making an outright gift of money or property is a quick way to transfer assets to the younger generation, but significant gifts can trigger taxes. For 2022, gifts exceeding $16,000 are subject to gift taxes, which are generally paid by the gifter. Making a series of below-threshold gifts over a number of years is one way to avoid gift taxes. Married couples can double their impact by each gifting the full amount of the annual exclusion; for 2022, a couple can gift $32,000 to as many people as they like without triggering gift taxes.
But be aware of the lifetime estate and gift tax exemption. The Tax Cuts and Jobs Act raised this threshold to $12.06 million per individual for 2022, but it will drop down to around $6 million starting in 2026. All gifts an individual makes in excess of the annual gift tax exclusions will be counted toward the value of their estate when they die, which may have estate tax implications for their heirs.
Education expenses: Funding a younger relative’s education is a tangible way of investing in your family’s future. There are a few tax-advantaged ways to transfer assets for education purposes. One option is to pay a student’s tuition directly; the IRS does not tax tuition as long as it is paid to the school. Anyone can also contribute to a student’s 529 plan, where that money grows tax-free. Contributions themselves are taxed, however.
Capital gains: What if someone wants to transfer stocks, property or other capital assets to a younger family member while they are alive? Under current capital gains rules, transferring property before death does not give the new owner a step-up in basis, which may equal higher capital gains taxes when they eventually sell the asset. An heir only benefits from a step-up in basis when property is transferred to them upon the owner’s death. Capital gains taxes have to be part of the conversation you have with your advisors when you are thinking about transferring capital assets.
Long-term care coverage eligibility: Know that asset transfers you make now could affect your ability to qualify for long-term care insurance under your state’s Medicaid program. Most states use a five-year lookback period when someone applies for coverage. Having transferred property and wealth to family members within that prior five-year period may delay the date when you are eligible to get coverage.
Generational Wealth Transfers After Death
There is a different set of concerns when you plan to preserve family wealth by transferring assets after death. Some of things that will come up during estate planning include:
Estate taxes: Assets that are in your name at the time of your death are counted toward the value of your estate and thus may be subject to estate taxes at rates as high as 40%. Money and other assets passed through your will have to go through probate before they are distributed to heirs, so family members may not be able to access these assets for months or years after your death. Make sure you are taking full advantage of trusts and other financial planning tools to help you take assets out of your name so they can be transferred outside of the probate process.
Generation skipping: Some parents opt to skip their children when making generational wealth transfers, leaving money to their grandchildren and great-grandchildren instead. This strategy may be made for personal reasons or financial ones. From a financial perspective, skipping children and leaving significant wealth to grandchildren may trigger the Generation Skipping Transfer tax. Essentially, this tax means that an asset that’s transferred to a grandchild is taxed like it would have been if it had passed through their parent’s estate first and then left to them. GSTT issues are complicated, so rely on your tax advisors for specific guidance.
Trust management: You can spend your life protecting your assets, then carefully plan tax-advantaged ways to transfer them to family—only for the first generation of heirs to lose everything through poor financial decision making. Choosing the right trustees and creating clear parameters for how and when money should be distributed is essential for prolonging your financial legacy.
Careful tax planning allows you to preserve and grow your money for the benefit of your kids, grandkids, great-grandkids and anyone else who follows. Generational wealth transfers are complex. Planning these transfers is not something L&H recommends putting off. If you need help preserving family wealth, contact us today.
Steven Haynes, MBA, is an administrative partner at Livingston & Haynes. Steve’s firm, Emerging Business Partners (EBPI), became an affiliate of L&H in 2007. Steve specializes in individual tax planning and compliance services and bookkeeping, payroll, and business advisory services, including tax, M&A, and funding and equity transactions, for privately-held businesses and technology, entrepreneurial, and emerging growth firms.