Reflections

How to Maximize Your Estate for Future Generations

By Sean Condon, CFP®

Money isn’t everything, but if you can pass wealth to the next generation, it can transform your family’s future.

It takes a level of planning beyond wealth building strategies to effectively pass it on to the next generation.  When planning for your financial legacy, keep the following considerations in mind.

Estate Planning Goals

Having an estate plan in place can help you feel more confident that your loved ones will be taken care of.  The first step is to consider your goals.  Comprehensive planning can help solve several needs, including providing financial support for your spouse and heirs, ensuring your assets will be distributed according to your wishes, and minimizing taxes and expenses.  Initial questions to ask yourself include:

  • Is there concern regarding your heirs’ ability to manage and protect their wealth?
  • Do any heirs have special needs you would like to meet?
  • Are you looking to protect assets from a beneficiary’s divorced spouse or future creditors?
  • Are you concerned about a tax burden imposed on assets before they reach your heirs?

Protecting Your Legacy

When most people think about threats to the financial legacy they want to leave to future generations, one of the first things that comes to mind is taxes.  There is a hefty estate tax upwards of 40% (plus potential state taxes) for any assets you own at passing above the “exemption amount” of $11.7 million per individual ($23.4 million per couple).  Starting January 1, 2026, the exemption will be reduced to $5.49 million adjusted for inflation, likely somewhere around $6 million ($12 million per couple).

One of the most effective ways of protecting your estate from this future tax is annual gifting.  You can give $15,000 ($30,000 per couple) in assets annually with no gift tax needing to be filed.  Gifting appreciated stocks can be doubly effective as it allows you to pass on any capital gains to your heirs at (potentially) a lower tax rate if they do not earn as much income as you do.

Gifting assets into a trust is often an effective strategy.  Investments can be gifted to the trust, and as the founder of the trust, you get to set the rules and determine how the assets should be distributed.  You can also set up rules for how the assets are managed and invested within the trust.  Distributions can be determined for your beneficiaries at certain ages, properties can be dictated to be used for certain purposes, and other conditions may be established as you see fit.  Additionally, a trust is also not subject to probate and the associated costs.  If assets are in an irrevocable or permanent trust, they will also be sheltered from lawsuit liability since the assets technically no longer belong to you.

Trusts Built for Growing

How you plan your estate will have a significant impact on how much your family must pay in taxes, especially if you own assets like company stock that you expect to appreciate substantially.

Strategic estate planning can allow you to minimize estate tax and preserve family history.  One example of this strategy is the creation of a Grantor Retained Annuity Trust, or GRAT.  A GRAT can freeze the taxable value of a business or investment in its early stage, allowing you to limit future taxes.  You then receive an annuity payment in return.  You can retain control and continue to receive cash flows upon exit.

Assets with a low current valuation compared to their expected future value (such as stock in a privately held firm) are particularly well suited to putting into a GRAT.  This is because assets with the potential for great appreciation also have the potential for triggering large estate tax liabilities, and a GRAT allows you to bypass these future taxes.

Family LLC Planning

One of the more sophisticated – yet effective – estate planning strategies is the Family LLC.  Ideal for families projecting to be well above the federal estate tax limit, a Family LLC can help reduce estate taxes while ensuring permanence of the family’s wealth in a businesslike structure.

Here, assets are transferred into an LLC entity in exchange for ownership “shares.”  Parents are then owners of the LLC shares rather than the underlying assets.  Beneficiaries can receive their own interest in the LLC throughout life or at passing, as opposed to assets or cash. Profit distributions can be made depending on the family’s wishes.

The main unique advantage to this set up is the Valuation Discount.   The estate tax is determined by the value of the assets reported on the tax return at death.  The lower the value of the assets, the lower the estate tax.  The value of assets in an LLC can often be discounted on a tax return because of its lack of marketability and lack of control.

Remember that heirs are only receiving shares in the family LLC, not outright assets.  Shares that have no voting or management rights are clearly less valuable than the underlying asset.  So, while the ultimate discount will be based on facts specific to any situation, a typical discount range is 20-40%.  This means that a $10 million asset would be reduced by $4 million, saving $1.6 million in estate taxes.  This discount can also be applied to any gifting of shares during life.

Proper Preparation

The last thing you want is for your estate, built from years of hard work and planning, to whittle away.  There are numerous ways to help ensure your estate does not decline amidst the transfer to the next generation, and our team of Windgate Wealth Management professionals is equipped with the skills necessary to help you navigate this exchange.

To see if we would be a good fit to partner with you, reach out by calling (844) 377-4963 or emailing windgate@windgatewealth.com. You can also book an appointment online here.

Perritt Capital Management, Inc. is the Registered Investment Advisor for Windgate Wealth Management accounts and does not provide tax advice. Consult your professional tax advisor for questions concerning your personal tax or financial situation.

Data here is obtained from what are considered reliable sources; however, its accuracy, completeness, or reliability cannot be guaranteed.

First published July 2021.

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