• Brian Bass

Successful Estate Planning Starts NOW

Estate plans are created during a person’s life to manage their assets and dispose of their estate after they pass on. A good estate plan maximizes the assets handed down to beneficiaries, and there are several strategies you can deploy now to ensure as much as possible goes to your loved ones. A benefit of these strategies is they remove assets from your estate but do not count against your lifetime gift tax exemption.

Effective estate planning should incorporate strategies that can minimize your tax liability, while also providing effective ways for you to benefit those you love.

A Strategy for Now: Gift Tax Exclusions

Minimizing taxes on your account means you get to pass more on – and one of the most gratifying ways to do that is to begin now, by utilizing the gift tax exclusion. You may gift up to $15,000 each year to any individual, for any reason, without incurring a gift tax. This $15,000 also does not count against your lifetime gift tax exemption of $11.7 million (2021). Gifting cash is the most tax efficient way to do this, because stock gifts can incur a capital gains tax that the beneficiary must pay.

However, if you are gifting to a minor, your investment advisor can set up an investment account so that your gift can potentially grow. The Uniform Gifts to Minors Act and the Uniform Transfers to Minors Act (UGMA/UTMA) allow you to create a custodial account you make gifts to that can be invested in the minor’s name, for any expense that benefits the minor.

Depending on the ages/life stages of your children or others you wish to give to, different priorities may apply. For adult children who are starting their own families, gifting towards immediately practical things, like mortgage payments, paying down debt, or further education can be immensely helpful. For younger children or grandchildren, you can take advantage of education-focused savings or investment accounts to start an account that will grow along with them.

Why Prioritizing Education Pays Dividends

Gifts to cover tuition, if paid directly to the educational institution, are not counted against your annual $15,000 gift tax exclusion or your lifetime maximum. However, they only cover tuition and does not include room and board, books or supplies, so you may still want to use a 529 savings account to ensure that the total costs of a college education are covered.

529 plans are tax-advantaged savings plans specifically designed to help parents pay for their child’s education (although, they can be used by more than just parents). 529 plans are not just for college – tax-free withdrawals may also include up to $10,000 per year in tuition expenses for K-12 schools. State tax treatment of K-12 withdrawals varies. Although contributions are not deductible at the federal level, earnings grow federal tax-free and there is no federal tax on withdrawals to pay for college. Depending on your state, you may be able to deduct contributions from your state taxes.

All 529 plans have a plan manager, usually a financial services firm, that manages the portfolio of investments. You’ll be able to create a portfolio from an offering of mutual funds and ETFs, and tailor it to your time horizon and investment preferences. Both you and your spouse (and anyone else that wants to – it’s not limited to parents) can contribute up to $15,000 per year each (in 2021) and still fall under the gift tax exemption. You can also front-load the account with a total of five years’ worth of your annual exclusion gifts, meaning your child’s 529 can begin with a balance of $75,000.

To get the most benefit out of these accounts – start early! They can be set up as soon as a child has a social security number, providing potential for many years of tax-free growth. We can assist you in setting these up and selecting appropriate investments, based on when the money will be deployed.

The Bottom Line

Effective estate planning should incorporate strategies that can minimize your tax liability, while also providing effective ways for you to benefit those you love. Let us help you can create a thoughtful approach to utilizing the available tools that will work for years to come.

Investors should consider the investment objectives, risks, charges and expenses associated with municipal fund securities before investing. This information is found in the issuer's official statement and should be read carefully before investing.

Investors should also consider whether the investor's or beneficiary's home state offers any state tax or other benefits available only from that state's 529 Plan. Any state-based benefit should be one of many appropriately weighted factors in making an investment decision. The investor should consult their financial or tax advisor before investing in any state's 529 Plan.