By now, if you follow politics at all you’ve probably heard the impending “Blue Wave” that is going to sweep the nation later this year. I’m not going to comment on a possible Blue Wave, Red Wave, or any other color of wave other then the really, really big one–the tsunami of waves that is going to hit the U.S. over the next 30 to 40 years. That, my friends, is what I’ll call the Big Green Wave. If you’re a fan of Tulane athletics, you may be cheering. Hooray! Finally, a blog post about my beloved Tulane Green Wave! But again, I’m not talking about that, either. The Big Green Wave that is expected to come crashing over the United States between now and 2050 is what is biggest intergenerational transfer of wealth in the history of planet earth. Estimates that up to $30 trillion in value will be transferred from aging baby boomers to their children and grandchildren during the next three to four decades. That’s a lot of green! So, if you’re one of those baby boomers with money burning a hole in your pocket or you’re the offspring of a baby boomer looking to have some of the family wealth sent your way, what do you need to know about making the transfer in the right way? And by “the right way,” I mean with the least tax expense and with the maximum assurance that the generous baby boomer parent’s wishes are going to be followed? Well, I have put together a short, five key point list of things to keep in mind when planning that big family Green Wave.
- Only Really, Really Big Green Waves are Taxable. Thanks to the Tax Cuts and Jobs Act that went into effect at the beginning of this year, only estates in excess of $11,180,000 are subject to the federal estate tax. And, if you’re married, a husband and wife can leave twice that amount (i.e., $22,360,000) without the imposition of the federal estate tax. One caveat, though: the super, duper “unified credit amount,” which is what that $11,180,000 is called (the “unified credit amount” part; I just added the super, duper to differentiate it from a more modest unified credit amount), drops back to a more modest level of $5 million, plus inflation adjustments (it would have been $5.6 million this year in the absence of the passage of the Tax Cuts and Jobs Act). So, for most people, making gifts to the next generation are not going to be a tax problem. But for those in the wealth-range that would be taxable without the super duper unified credit amount, there may be a good reason to talk to your wealth advisor and estate planner about the possibility of making a large transfer before the unified credit amount drops back in 2026. And this leads me to Key Point Number 2 . . .
- All Things Being Equal, a Green Wave of Appreciated and Appreciating Property at Death Beats a Green Wave of the Property During Life. Unless you have a compelling reason for making a wealth transfer during your life, you and your kids and grandkids will be better served for the transfer to come at your death, at least if the property has appreciated since you acquired it or it is likely to appreciate in value between now and the time of your death. The reason? Property that passes at death receives a step up in basis to its value at the date of death. For example, assume you bought a vacation home on the coast of Maine thirty years ago and paid $1 million for it, but now it’s worth $10 million. If you were to give it to your children now, they would “inherit” your $1 million basis in the property, so if they were to turn around and sell it for $10 million upon its receipt, they would have $9 million in taxable capital gain and so would pay a big chunk of change to Uncle Sam for the income tax on that profit. But, if you instead waited until you died to transfer the Maine property to your children and it was worth $10 million upon your death, they could turn around the next day and sell it for $10 million and have -0- capital gain, and, thus, -0- income tax on the sale. But what about gifts of more fungible assets, say like, money? Well, that brings me to Key Point Number 3 . .
- A Transfer of Wealth is Not All About Minimizing Taxes. Regardless of what the tax impact of a wealth transfer is (and as I mentioned above, unless you’re in the elite group of the wealthy, it’s unlikely that the federal estate tax is going to be a problem for you), you still want your desires and wishes to be followed. And, it’s a good bet that one of your wishes is that the money you give to your kids is not going to be wasted and spent down to nothing in short order. In other words, you want to help your kids have something for the long term, not have a short-term party. So, this is perhaps the biggest point of all to keep in mind–you’ll probably going to want and need a trust of some type to make sure that the wealth that is passed on in a way that protects it from being wasted. Of course, if you’ve decided to pass your wealth along by will, you’ll need a testamentary trust. A gift during life will require an irrevocable inter vivos trust. One of the great things about a trust as a vehicle for gift-giving, whether through a will or during life, is that the terms of a trust are essentially limited only by your own imagination. Want to provide income to your kids for a few years and then give them a portion of their ultimate gift at certain ages? You can do that with a trust. Want to make sure that distributions are only used for certain purposes, such as educational expenses or purchasing a home? You can do that, too. And this brings me to Key Point Number 4, the last of the key points in this post. . .
- Think, Discuss. . . then Think Some More. It’s important to really consider thoughtfully what restrictions and conditions (if any) you want to put on a gift to your kids and grandkids. You should take their own expected needs and situations into account, but you should also think strategically about how you want your gift to them work now and into the future. You’ll want to have some idea in mind when you talk to your estate planner about your proposed gift to your family, and since it’s most likely that any transfer to a trust will be irrevocable (unless it’s in your will, of course), you will want to think carefully about this important matter.
That’s it for now. Congratulations on being in a position to help your family through the transfer of wealth to them. Now, make sure that your generosity makes the most positive impact on them in the short and the long term.