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Wealth Preservation and Family Transfers
Posted May 2007

Without proper planning, transferring family wealth can be a taxing issue. Generally speaking, moving wealth from one generation to another while minimizing income, gift, and estate taxes is the primary tax planning objective. To do so, one needs to know how the IRS taxes assets transferred to heirs—either during life or at death. The traditional planning scenario has been to leave money and other assets to heirs when you die; however, the current planning strategy is to give away as much as possible during life to take advantage of lifetime-transfer benefits and to reduce the size of your estate. The challenge is to use the credits and deductions available and to use gift-transfer techniques to your advantage.

The Transfer-Tax System

Gift and Estate Taxes—Taking full advantage of the $12,000 annual gift-tax exclusion and the gift-  and estate-tax credits is a prudent way to minimize transfer taxes and increase the amount your beneficiaries receive. Under the 2001 tax act, you can currently transfer up to $2,000,000 cumulatively free of estate-tax and $1,000,000 free of gift tax. While the gift-tax credit will remain at $1,000,000, the estate-tax credit will increase, allowing you to transfer free of tax $3,500,000 in 2009. The estate tax is scheduled to be repealed in 2010, but it will return in 2011 at levels determined under pre-2001 laws unless Congress takes action.

The chart below shows the effect of the 2001 Tax Relief Act on estate-tax rates and exemption amounts.

Generation-Skipping Trust—If you leave assets to your children, who then leave them to their children, those assets—plus any appreciation—can potentially be subject to transfer tax twice. If you leave assets directly to your grandchildren, those assets may be hit with a generation-skipping tax in addition to gift or estate tax. You are allowed a generation-skipping tax exemption—currently $2,000,000—and many people use that exemption to create a trust that can benefit children before passing to grandchildren. The trustee can be given broad investment and distribution discretion. Such a strategy avoids the generation-skipping tax and shelters any appreciation on the assets in the trust from further transfer tax. (Note: Generation-skipping exemptions are set to increase to $3,500,000 in 2009, as is the estate-tax exemptions noted above.)

Charitable gifts can play an important role in significantly reducing your "transfer tax" liability. For example, a gift of $100,000 will save $45,000 in transfer tax. And, if the gift is made during life, income tax and capital-gain tax savings may also be obtained if appreciated assets are used.

We’re Here to Help
Wealth-preservation planning allows for the effective use and transfer of assets by, and for, your family, as well as the charities that are meaningful to you. Deciding how much you need for yourself, how much to leave your heirs, how much tax will go to the IRS, and how to benefit charity leads to effective distribution of wealth using a variety of techniques chosen by you.

Our next installment in this series, Transfer Techniques, will discuss some of the opportunities which are available to you as you plan your wealth preservation strategies.

Please contact us if we can be of any assistance in this process.

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