By Daniel Baumgartner & Petra Peters
You want to make sure your loved ones are financially stable. After all, you have worked hard to accumulate your wealth, and you want the next generation to benefit as well.
In addition to taking care of the next generation, it’s also important to transfer your wealth in a way that won’t incur tax liabilities—but are there ways to do this and also avoid inheritance or gift taxes?
We’ll take a look at four ways you can transfer your wealth in a tax-efficient way.
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 taxable portion of your estate, and you can gift up to $17,000 in the U.S. to a loved one before any gift taxes are incurred. If you are splitting the gift with your spouse, you can give up to $34,000 combined for 2023. To effectively transfer wealth to the next generation, you can ensure that you give the maximum amount every year.
The majority of European countries have estate, inheritance, and gift taxes as well. Relatives from European countries, however, can typically provide a gift to a U.S. person tax free, as long as the aggregate of the gift funds do not exceed $100,000 in a year. Funds used for tuition payments or medical expenses to a U.S. person are not considered gift funds.
Gifts provided from a U.S. person to a foreign citizen are subject to the same rules as gifts between U.S. citizens.
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 for 2023, an individual can gift up to $85,000 and a married couple could gift up to $170,000 without incurring gift taxes! The beneficiary can then withdraw the funds and the investment growth tax-free to pay for qualified education expenses.
Creating a trust is another way to transfer wealth to the next generation in the United States however, this may not be the case in Europe. The rules and tax laws relating to trusts vary from country to country. For instance, if more than one family member lives in Germany, consider making distributions to each of them individually as the tax free amount is granted per capita.
But if you are transferring wealth in the U.S. and 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.
Consider the Gift of Time
Perhaps you are not as concerned about money, but more about spending quality time with them as you age. Rather than safeguarding your wealth to be left after you’re gone, consider buying a vacation home where everyone can gather or taking your whole family on a dream vacation. These experiences will produce lifelong memories that are likely more impactful than leaving them a larger inheritance.
Consult With a Wealth Advisor
We understand you likely have an investment strategy in place to plan for the future, however, if you have been thinking about making a change, now is the time to schedule a portfolio review to find out if you could benefit from a different approach. At Terra Nova Asset Management, we believe our relationships with our clients is the main pillar of investment success and client satisfaction. Our investment advisors truly enjoy working together with our clients, always putting them first—now and well into the future.
Does it seem like we might be a good fit? Reach out to us directly at 212-355-1234 or email@example.com for the New York office (Petra) or 855-248-6630 or firstname.lastname@example.org for the New Jersey office (Daniel). You may also contact us here to schedule a meeting and we’ll get in touch with you soon!
Daniel Baumgartner is a founding partner of Terra Nova Asset Management LLC, a partner-owned investment advisory firm that manages individual portfolios for clients. Daniel has extensive experience in marketing, development of special U.S.-investment products, as well as customer acquisition and relationship management. His ultimate goal is to make a difference in his clients’ financial lives through honest investment advice. He strives to provide high-touch, personalized service and enjoys getting to know a client’s personality as it relates to their financial circumstances before crafting the right solutions. As money is a very personal subject, Daniel takes his responsibility as an advisor very seriously, forming long-term relationships with clients based on trust.
Daniel received his degree in finance and international business from New York University. Outside of the office, he is a hobby landscaper, street photographer, and has a great interest in U.S. and European history (16th-19th centuries), believing it helps him answer the question “Why is something the way it is?”
Petra Peters is a founding partner and the Chief Executive Officer of Terra Nova Asset Management LLC, a partner-owned investment advisory firm that manages individual portfolios for clients. Petra has decades of experience in the banking industry, asset management, overseeing the administration of individual accounts, and designing and advising specialized funds tailored to the requirements of international private and institutional clients. With extensive knowledge of both Europe and the U.S., she’s able to provide advice and services beyond the typical investment advisor. Petra desires for her clients to live a financially care-free life so they can pursue their passions, and she values their trust and gratitude. Creating invaluable friendships formed over years of partnership, some clients even consider her part of their family.
Petra’s interests outside of work include classical music, history, travel, charities, motorcycling, and golf. She is also on the board of a German charity.