Sharing A Wealth Of Values

Sharing A Wealth Of Values

OCEAN CITY – With unprecedented wealth poised to transfer to the next generation, the creators of that wealth are giving serious thought to how they want to build a strong, lasting legacy. Minimizing estate and gift taxes has always been important, but "our clients today want to transfer their family values and to have their legacy managed in a way they deem appropriate," says Chris Heilmann, Chairman and CEO of Merrill Lynch Trust Company. And with people living longer, parents and grandparents are making lifetime gifts to experience the joy of watching younger generations benefit.

Currently, individuals can give up to $12,000 per beneficiary per year without any gift-tax consequences (married couples can give up to $24,000 per beneficiary each year). For gifts above this amount, there is a $1 million cumulative lifetime exemption ($2 million for married couples) before gift taxes are due. But allocating the funds is only one step toward a more meaningful gifting strategy. There are several options for making tax-efficient gifts that give you more control over how your gifts are used.

Say you and your spouse want to start giving $24,000 annually to each of your minor grandchildren, but you do not feel comfortable making such large gifts outright. One solution may be to establish a Uniform Gifts or Transfers to Minors Act account. However, these accounts must be turned over to your grandchildren when they come of age — either 18 or 21, depending on the state. If you are concerned they will be too young to control substantial funds, you may want to consider a 2503(c) Trust (named after the relevant Internal Revenue Code section) or a Crummey Trust (named after a case decided decades ago). Gifts to each of these trusts qualify for the annual gift-tax exclusion. With certain limitations, these trusts can be structured as you see fit.

If your values run toward education, you can make your annual exclusion gifts to a state-sponsored 529 savings plan for each grandchild. One of the benefits of a 529 plan is that you can "jump start" or pre-fund a 529 plan with five years of annual exclusion gifts (up to $60,000 for an individual or $120,000 for a married couple) in one year, provided you make no additional gifts to the plan during that five-year period. Earnings and distributions are tax-free when a grandchild withdraws them to pay for approved college expenses. Should you decide to retract the gift, you can get the money back, minus a 10% penalty and tax on the earnings. Another option is to wait until your grandchild attends college and write a check directly to the institution.

If you plan to leave significant wealth to your grandchildren, you may want to consider a dynasty trust, which allows you to shelter assets from the generation-skipping transfer (GST) tax — currently a flat 45% tax assessed in addition to any estate and gift taxes. The GST tax applies only to transfers made to your grandchildren (or other beneficiaries more than one generation removed from you). It is not assessed when you pass assets directly to your children. But a dynasty trust can be a tax-efficient way to benefit your children and your grandchildren.

The key to determining what gifting vehicles will work best for you and your family is to start with open communication with your family and advisors. Your financial advisor and other trusted professionals can help you find the right solutions to transferring your assets based on your specific goals and values, and to ensure that your legacy will continue for years to come.

(A Merrill Lynch Senior Financial Advisor. She can be reached at 410-213-8520.)