Wanting what’s best for your loved ones is natural, and leaving an inheritance can demonstrate your consideration for their future. However, if you live in one of the six states with an inheritance tax, amounts over the state’s threshold could be taxed up to 16%.
If your goal is to ensure the transfer of generational wealth for your beneficiaries, there are several techniques to consider.
Take Out a Life Insurance Policy
Life insurance is an effective and cost-efficient strategy for maximizing your legacy. An insurance agent can help you select the most suitable policy. You might opt to place the policy in an irrevocable life insurance trust to keep the proceeds out of the estate and gain tax benefits, underscoring the advantages of this approach.
Pros
Proceeds Aren’t Taxed
Life insurance benefits paid in a lump sum typically aren’t taxed.
Liquidity
It provides immediate liquidity, allowing your life insurance beneficiaries to settle liabilities without selling assets.
Cons
Potentially Higher Premiums
Monthly costs can be higher if you purchase the policy later in life or have a pre-existing health condition.
Requires Planning
Careful consideration is necessary to choose the right type of insurance policy for your situation and ensure it’s structured correctly.
Gift Assets to Loved Ones During Your Lifetime
Gifting assets to loved ones while alive can reduce your estate’s value and lower the amount subject to inheritance tax. If you want to take advantage of the IRS’s annual gift tax exclusions, work with an experienced professional. They can help you transfer assets to your beneficiaries before your passing.
Pros
Reduces Overall Value of Estate
The gifting strategy can help to decrease your estate’s value, potentially lowering your beneficiaries’ tax liability.
Provides Untaxed Gifts
The IRS allows yearly untaxed gifts up to a limit, enabling you to incrementally transfer wealth without gift taxes.
Cons
Loss of Control
You lose control over gifted assets, which may be problematic if your financial situation changes.
Risk of Surpassing Limits
Any amount over the IRS’s annual tax exclusion limits may be subject to taxes.
Establish Trusts to Strategically Distribute Assets
Establishing a trust can allow you to efficiently manage and distribute assets helping maximize your legacy for beneficiaries. A financial advisor can help you select the right trust. Different types of trusts can meet specific goals, such as protecting assets and fulfilling your wishes. You can then fund and manage the trust based on your preferences.
Pros
Maintains Control over Distributing Assets
Trusts allow you, the grantor, to decide how and when assets are distributed.
Tax Efficiency
Specific types of trusts can help to preserve generational wealth for beneficiaries.
Cons
May Be Expensive
Establishing a trust includes trustee fees, legal fees, and ongoing administrative costs that can add up over time.
Complexity
Selecting the right trust can be complex due to the numerous options available.
Make Charitable Donations
Donating to charitable organizations can have an impact on the amount of your estate that’s subject to inheritance tax, helping to maximize your legacy. After choosing tax-exempt philanthropic organizations, determine whether to make donations through your will or while alive. Work with an estate planner or financial advisor to properly structure donations.
Pros
Supports Charitable Causes
Donations to charities and nonprofit organizations allow you to leave a lasting legacy, aligning your financial plans with personal values.
Reduces Size of Estate
Charitable donations can reduce the size of your estate, thereby lowering the amount subject to inheritance taxes.
Cons
Reduces Inheritance for Beneficiaries
While charitable donations can reduce your tax obligation, they may also reduce the amount you pass onto your beneficiaries.
Requires Careful Planning
This strategy requires precise timing and an appropriate donation structure, so professional advice is necessary.
Consider Family Limited Partnerships to Lessen Impact
A family limited partnership (FLP) allows you to maintain control over the management of your assets, preserve wealth, and slowly transfer ownership to beneficiaries. Using this strategy starts by working with legal and financial advisors to transfer assets or business interests into the FLP. Then, partnership interests are gradually distributed to beneficiaries based on an estate plan. The interests may be gifted or sold at a discounted value, reducing the tax impact and keeping the assets in the family.
Pros
Controls Transfer of Assets
You maintain control over the management of assets to protect family wealth.
Tax Savings via Discount Valuations
FLPs can offer tax savings through valuation discounts and may reduce overall tax liability.
Cons
Costs and Complexity
Establishing and maintaining an FLP requires specific expertise, which can increase associated costs.
Extra IRS Scrutiny
The IRS monitors FLPs closely, especially when applying valuation discounts.
Tap a Professional for More Insight into Maximizing Your Legacy
Leaving the legacy and inheritance you desire requires strategic planning and specialized tools. Don’t hesitate to reach out to a trusted financial professional for help navigating the many considerations and options.
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Bankers Life Securities, Inc., Bankers Life Advisory Services, Inc., and their representatives do not provide legal or tax advice. Each individual should seek specific advice from their own tax or legal advisors.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.
Bankers Life is the marketing brand of various affiliated companies of CNO Financial Group including, Bankers Life and Casualty Company, Bankers Life Securities, Inc., and Bankers Life Advisory Services, Inc. Non-affiliated insurance products are offered through Bankers Life Securities General Agency, Inc., (dba BL General Insurance Agency, Inc., AK, AL, CA, NV, PA).
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