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Big Questions for Money Moments

Now that I’m wealthy, should I start gifting to the next generation and charities of interest?

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Under current legislation, as a result of the Tax Cuts and Jobs Act of 2017, each individual can gift (during their lifetime) or transfer (at death) about $11.2M of assets, free of federal tax. Thus, for married couples, the amount is about $22.4M. These exemption thresholds are scheduled to increase by the rate of inflation through the end of 2025, the point at which current legislation sunsets. Any gifts made in excess of these thresholds, either during life or at death, are subject to a 40% federal tax. Obviously, these are big exemption numbers, but if you’re young and continue to work, these thresholds can become relevant in a hurry. Moreover, these thresholds may be reduced by future legislation. Avoiding a tax haircut such as 40% should most certainly be a planning priority for you and your family. We find that financial modelling is a good place to start. A number of inputs around life expectancy, investment returns, future savings, and anticipated living expenses can generate at least initial outputs with respect to your anticipated wealth at death. These models, tailored over time, can serve as a guiding light with respect to gift and estate planning. Along the way, here are some of the many strategies and techniques that may be used to help reduce the size of your taxable estate; and thus, help eschew estate tax:

  • Utilization of grantor trusts for children to house gifts and allow parents to pay the ongoing taxes associated with the trusts through time (implicitly, a tax-free gift each year).
  • Utilization of the annual gift exemption – the amount you can give away to any person (or a trust for the benefit of a person) each year without it counting as a reduction against your lifetime exemption ($11.2M) – currently $15K (or $30K for married couples that split the gift).
  • Loans to children (or to trusts for the benefit of children) subject to interest set by the Applicable Federal Rates as a mechanism to push investment growth outside of your estate.
  • Gifting of assets – such as company stock or a particular piece of real estate – that are expected to rapidly increase in value via Grantor Retained Annuity Trusts (GRAT) or outright transfers.
  • Gifting of partial ownership interests within a Family Limited Partnership or other structure to obtain valuation discounts on the transfers.
  • Utilization of irrevocable trusts with situs in states with no state tax to potentially avoid high tax rates in your home state (e.g. California).
  • Accelerated funding of 529 education savings plans.
  • Charitable gifting via a Donor Advised Fund, Charitable Remainder Trust, or Charitable Lead Trust.

Working with an advisory firm with in-house estate planning expertise to help navigate these potential planning opportunities can be of significant value.


Meet the Author

Aaron Waxman

Partner

Aaron is a Partner based in the San Francisco office. He provides comprehensive investment and planning advice to individuals. While Aaron works with a wide array of clients, he has expertise in working with multigenerational families, business executives, and entrepreneurs with above average income and estate tax planning needs.

Before joining Cerity Partners, Aaron was a Principal at B|O|S and served on the firm’s Board of Managers, strategizing firm-wide initiatives and making critical decisions on the day-to-day functioning of the firm. Prior to B|O|S, he worked for PricewaterhouseCoopers LLP as a Manager in the Private Client Services Group.

Aaron placed on the Forbes “Best-In-State Wealth Advisors” list for the San Francisco region in 2019, 2020, and 2021. In 2019 he also ranked on Forbes “Top Next-Gen Best-in-State Wealth Advisors” list for California and on its “Top Next-Gen Wealth Advisors” list. Additionally, in 2017, Aaron was the recipient of a “40 Under 40 Award” by the San Francisco Business Times.

Aaron earned his Bachelor of Science in Finance from Santa Clara University. He holds both the Certified Financial Planner (CFP®) and Certified Public Accountant (CPA) designations as well as a Series 65 license. Aaron is a member of the Stern Grove Festival Association Board of Directors. He previously served on the Board of Directors for the Headlands Center for the Arts, Step One School, and Blind Babies Foundation.

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