Tax-Advantaged Gifting Strategies to Simplify Estate Planning

A good estate plan maximizes the assets handed down to beneficiaries, and there are several strategies you can deploy now to ensure as much as possible goes to your loved ones. A benefit of these strategies is they remove assets from your estate but do not count against your lifetime gift tax exemption.

Your financial advisor can help you decide how to deploy your annual gift tax exclusions and can help you set up accounts funded with your exclusions that can be used for your children, grandchildren or anyone else you care about.

A Strategy for Now: Gift Tax Exclusions

Minimizing taxes on your account means you get to pass more on – and one of the most gratifying ways to do that is to begin now, by utilizing the gift tax exclusion. You may gift up to $17,000 each year to any individual, for any reason, without incurring a gift tax. This $17,000 also does not count against your lifetime gift tax exemption of $12.92 million. Gifting cash is the most tax-efficient way to do this because stock gifts can incur a capital gains tax that the beneficiary must pay.

However, if you are gifting to a minor, your investment advisor can set up an investment account so that your gift can potentially grow. The Uniform Gifts to Minors Act and the Uniform Transfers to Minors Act (UGMA/UTMA) allow you to create a custodial account you make gifts to that can be invested in the minor’s name, for any expense that benefits the minor.

Depending on the ages/life stages of your children or others you wish to give to, different priorities may apply. For adult children who are starting their own families, gifting towards immediately practical things, like mortgage payments, paying down debt, or further education can be immensely helpful. For younger children or grandchildren, you can take advantage of education-focused savings or investment accounts to start an account that will grow along with them.

Why Prioritizing Education Pays Dividends

Gifts to cover tuition, if paid directly to the educational institution, are not counted against your annual $16,000 gift tax exclusion or your lifetime maximum. However, these gifts can only cover tuition and do not include room and board, books or supplies, so you may still want to use a 529 savings account to ensure that the total costs of a college education are covered.

529 plans are tax-advantaged savings plans specifically designed to help parents pay for their child’s education (although, they can be used by more than just parents). 529 plans are not just for college – tax-free withdrawals may also include up to $10,000 per year in tuition expenses for K-12 schools. State tax treatment of K-12 withdrawals varies. Although contributions are not deductible at the federal level, earnings grow federal tax-free and there is no federal tax on withdrawals to pay for college. Depending on your state, you may be able to deduct contributions from your state taxes.

All 529 plans have a plan manager, usually a financial services firm, that manages the portfolio of investments. You’ll be able to create a portfolio from an offering of mutual funds and ETFs, and tailor it to your time horizon and investment preferences. Both you and your spouse (and anyone else that wants to – it’s not limited to parents) can contribute up to $17,000 per year each (in 2023) and still fall under the gift tax exemption. You can fund the account with a total of five years’ worth of your annual exclusion gifts, so your child’s 529 can begin with a balance of $85,000.

To get the most benefit out of these accounts – start early! The accounts can be set up as soon as there is a little person to benefit from them, so starting before the child’s first birthday is ideal. Your financial advisor can assist you in setting these up and selecting appropriate investments, based on how the time horizon before the funds will begin to be drawn down.

The Bottom Line

Effective estate planning should incorporate strategies that can minimize your tax liability, while also providing effective ways for you to plan for the future of your children and grandchildren, and share your assets with them. Working together with your financial advisor, you can create a thoughtful approach to utilizing the available tools that will work for years to come.

If you’d like an objective second opinion about your finances, please contact Michael Shea, a CERTIFIED FINANCIAL PLANNER™ and owner of True Equity Wealth Management LLC. Email him at michael.shea@trueequitywealth.com or fill out a contact form.

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This blog is provided for informational purposes only. Such views are subject to change at any point without notice. The information in the blog should not be considered investment or tax advice or a recommendation to buy or sell any types of securities. Some of our blogs or information therein have been obtained from third party sources believed to be reliable but such information is not guaranteed. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. No reliance should be placed on, and no guarantee should be assumed from, any such statements or forecasts when making any investment decision.

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