Tax Savings Strategies for Wealth Transfer

Everybody needs an estate plan, regardless of their age, state of health, or even the size of their assets. An estate plan ensures that your money and property go to the people of your choice while minimizing the impact of taxation. Having a plan also will help your heirs access their inheritance faster and more easily.

You have numerous options, and one of them should be the best for you and your family.

The Fundamentals of Wealth Transfer

Federal law provides an estate tax lifetime exemption that allows an individual to transfer up to $13.61 million tax-free to beneficiaries in 2024. The figure rises to $13.99 million in 2025.

This exemption could change significantly at the end of 2025 when the Tax Cuts and Jobs Act (TCJA) expires unless Congress agrees to extend the provision. The provision’s chances of an extension rose with the reelection of President Donald Trump, who signed it into law at the end of 2017.

Assets valued at more than the exemption amount can be taxed at a rate of as much as 40%. That rate has been in place since 2013.

The estate tax applies to everything you own at the time of your death, including partial interests in some assets, but not to the overall value of your assets, referred to as your gross estate. Your heirs are permitted to subtract mortgages, the costs of administering the estate, any gifts you give to charity, other debts you hold at the time of death, and anything you leave to your spouse.

The Unlimited Marital Deduction

Federal tax law allows you to pass your wealth to your spouse with no limit. These transfers are completely tax-free whether they occur during your lifetime or when you die.

Of course, this exemption lasts only for the lifetime of the surviving spouse, whose heirs may face inheritance taxes on amounts exceeding the limit.

The Portability Rule

Another Internal Revenue Service (IRS) rule allows surviving spouses to reduce the impact of taxess on their heirs. The first spouse to die can transfer any unused portion of his or her own lifetime exemption to the survivor.

Let’s say the first spouse has died, passing on an estate that is valued at only half of the $13.61 million lifetime exemption. The surviving spouse can add the remaining $6.8 million to their own $13.61 million exemption for a total of $20.41 million under this portability rule.

The surviving spouse must file an estate tax return for the decedent to claim this right.

It’s worth noting that only Hawaii and Maryland offer portability for state-level estate taxes.

Ideally, both spouses are U.S. citizens because some restrictions apply otherwise. The IRS includes same-sex spouses provided that they’re legally married. It doesn’t recognize registered domestic partnerships or civil unions.

Tax-Efficient Ways to Transfer Wealth

Federal law provides a few other strategies to transfer your wealth without an undue tax burden if you are not married or want to leave a portion of your estate to others. 

Form an Irrevocable Trust

A trust is a legal entity set up by a grantor, usually the original owner of the assets it holds. The grantor funds the trust by transferring ownership of their property into its name or into the name of a trustee. The trustee is the individual or entity designated to oversee the trust upon the grantor’s death.

The assets that the trust holds don’t contribute to the grantor’s taxable estate.

One tax advantage to an irrevocable trust is that it can hold your life insurance policy. In that case, its value doesn’t contribute to the value of your taxable estate at the time of your death.

Moreover, any income earned by the assets held within the trust is taxed to the trust, not to the grantor, because the trust technically now owns the income-producing assets. This provides a benefit during your lifetime as well, easing your annual income tax burden.

The downside to an irrevocable trust is that, as the name implies, it can’t be amended, changed, or revoked by the grantor. It’s forever.

The grantor can’t reclaim the property they’ve placed into it. This is not the case with a grantor trust or revocable trust, which allows the grantor or creator to take back and reclaim assets placed into it or even dissolve the trust completely.

They can delete beneficiaries or add new ones without restriction.

Engage in Annual Gifting

You might prefer to simply give your wealth away during your lifetime, and the IRS has rules in place for this, too.

The gift tax is a separate level but it works in tandem with the estate tax. Gifting during your lifetime will decrease the value of your eventual estate because you’ve already given much of your wealth away, rendering your estate nontaxable. The IRS doesn’t want that to happen, so it imposes both taxes.

The tax code provides an annual gift tax exclusion of $18,000 per person per year for 2024, rising to $19,000 for 2025. You can give this much away, free of taxation.

Those numbers are more generous than they appear at first glance. The limit is for an individual, so multiple family members can get gifts.

“Take advantage of the gift-splitting provision,” advises Mike K. Earl, a certified financial planner and partner and director of The Wealth Group, Austin B. Colby & Associates in Minnesota. “For example, a married couple could give $36,000 to their son ($18,000 as a gift from each spouse). If this same couple’s son was married with two children, the couple could give up to $144,000 each year to their son’s family.” (Each spouse can give $72,000.)

You’re also granted a lifetime gift tax exemption, but unfortunately, it’s shared with the estate tax. Gifts that exceed the $18,000 yearly exclusion can be applied to your lifetime exemption so that the tax isn’t payable until your death, and they would then only be taxed if the total value of your estate and your lifetime gifts exceeds the annual estate tax exemption limit.

As with the estate tax, gifts made to your spouse or to charity don’t count against these limits. But lifetime gifts can subtract from the lifetime exemption if you do this, leaving less dollar-value protection for your estate.

Explore Other Gifting Options

Gifts made directly to a qualified educational institution or to a healthcare provider on behalf of someone other than yourself can be made tax-free.

Tuition and medical bills don’t apply against the annual gift tax exclusion, nor do gifts made to political organizations.

Form a Family Limited Partnership

A family limited partnership (FLP) provides joint ownership of family-owned assets to family members. Family members are either general partners or limited partners who assume varying (or no) responsibility for controlling the assets placed into the FLP’s ownership and managing its investments.

Parents and grandparents who donate their wealth and assets into an FLP then serve as partners who can transfer their partnership interests to other family members, including their children and grandchildren.

This can minimize or entirely dodge gift and estate taxes and protect assets from personal creditors, but the IRS does require that the partnership have a clear and definable business or investment purpose.

It must be created in such a way as to earn income of its own, and family partners must report that income on their own tax returns for income tax purposes.

“These structures can centralize family wealth management, provide some asset protection, and offer opportunities for tax-advantaged gifting through the use of valuation discounts,” says Celeste Robertson, a Texas-based estate planning and probate attorney with offices in Rockport and Corpus Christi.

Form a Generation-Skipping Transfer Trust

The generation-skipping transfer tax (GSTT) targets both lifetime gifts and estate bequests made to a person who is at least 37½ years younger than you, such as grandchildren or great-grandchildren you want to include in your estate plan.

The tax code provides for a generation-skipping transfer tax lifetime exemption as well. The maximum is $13.61 million for 2024 and $13.99 million for 2025.

The “skip person”—the individual who is two or more generations younger than the individual making the gift—must be the sole beneficiary of the trust and must have withdrawal rights to take advantage of the annual exclusion.

The Bottom Line

The federal gift and estate tax structure is currently generous enough to allow the vast majority of people to pass their wealth and assets to their loved ones tax-free.

You’ll still want to know and understand your options so you can properly plan for the future. Keep these taxes and options in mind as you plan your estate, and consider touching base with an attorney or tax professional who can guide you and keep you up to date with changes in the law.