Actionable Strategies and Money-Saving Tips
With a grasp of the basics, you can now explore specific, practical strategies for transferring your wealth thoughtfully and efficiently. These methods are commonly used and fully compliant with tax laws. The official source for federal tax information is the IRS.
1. Maximize Annual Gifting
The simplest way to transfer wealth is to use the annual gift tax exclusion we discussed earlier. Giving $18,000 per person per year can significantly reduce the size of your future estate over time while providing immediate help to your family. You can give cash, stocks, or other property. This is a powerful tool for helping with a down payment on a house, reducing student loan debt, or simply providing a financial cushion. Remember, these gifts are not considered taxable income for the recipient.
2. Pay for Education and Medical Expenses Directly
This is a wonderful but often overlooked strategy. You can pay for anyone’s educational tuition or medical expenses in any amount, and it will not count as a taxable gift. There is a critical rule: you must pay the institution directly. You cannot give the money to your grandchild to pay their tuition bill; you must write the check directly to the college or university. Similarly, you must pay the hospital or doctor’s office directly. There is no limit on this type of gift, making it an incredibly generous and tax-smart way to support your loved ones.
3. Let Your Heirs Inherit Appreciated Assets
As our example with the house showed, the “stepped-up basis” is your best friend when it comes to assets that have grown in value. This applies to stocks, mutual funds, real estate, and other investments. Unless you have a specific reason to do otherwise, your default plan should be to hold onto these assets and pass them on through your will or trust. Gifting them during your lifetime can create an unnecessary and substantial tax bill for your children.
4. Designate Beneficiaries on Your Accounts
One of the easiest ways to ensure a smooth wealth transfer is to check the beneficiaries on your financial accounts. Retirement accounts (like IRAs and 401(k)s), life insurance policies, and annuities allow you to name a “Payable on Death” (POD) or “Transfer on Death” (TOD) beneficiary. When you pass away, the money in these accounts goes directly to the person you named, bypassing the lengthy and often expensive court process known as probate. This is simple, free, and incredibly effective.
Important Note: Be aware of the SECURE Act’s 10-year rule. For most non-spouse beneficiaries who inherit an IRA or 401(k), they are now required to withdraw all the funds from the account within 10 years of your death. This can create a significant income tax burden for them, so it is something to discuss with your children and a financial advisor.
5. Set Up a Revocable Living Trust
A will is essential, but for many people, a revocable living trust is an even better estate planning tool. A trust is a legal entity that holds your assets. While you are alive, you control the trust completely—you can put assets in, take them out, and change the terms at any time. The primary benefit is that any assets held in the trust at your death do not go through probate. They can be managed and distributed to your heirs privately and efficiently according to the instructions you have laid out. A trust can also provide more control, allowing you to specify how and when your children receive their inheritance, which can be helpful if you are concerned they may not be ready to handle a large sum of money all at once.
6. Fund a 529 Plan for Grandchildren
If your goal is to help with education, a 529 plan is a fantastic vehicle. These are tax-advantaged savings accounts designed for education expenses. Contributions grow tax-deferred, and withdrawals for qualified education expenses are completely tax-free. You can contribute using your annual gift exclusion. There is even a special rule that allows you to “superfund” a 529 plan by making five years’ worth of contributions at once—that is up to $90,000 per person ($180,000 for a married couple) per beneficiary in a single year, without triggering the gift tax.
