Mo Vidwans
Everybody has a different definition of comfort. Of course all of us like to live comfortably and then have dreams about how our assets will be transferred to the next generation without any hassle. In our mind it all needs to happen immediately, without any publicity and without having to pay taxes. Fortunately, for most of us it is achievable and within our reach. We just have to think ahead and plan for it. It will not go well if enough thought is not given to it long before the event happens. Like the old saying goes: failing to plan is planning to fail.
The tax laws passed by Congress since 2001 have made it easy for most of us. We certainly do not have to worry about any Federal estate taxes if our individual net worth is less than $5.45M (2016), which is a large amount for most of us. It does eliminate Federal estate taxes but then, unfortunately, there are state estate taxes, probate costs, attorney fees, inheritance taxes and administrator cost, to mention just a few. It gets worse if you don’t have a “Will.”
Take heart. If you had been thinking about such issues, then you are already ahead of the game. If you have thought about it and have defined your problem, well, you are halfway there. The other half is all the actions you have to take.
Let us start with simple things first. You can give away, for calendar year 2016, $14,000 per person to as many people you wish without even having to do any reporting or creating any documents. You do not have to even know the person you are giving the money to; no relationship is required. Imagine this freedom! It is not necessary, of course, but it helps if you keep some records. However, IRS is not going to question or require them.
In the same line of thinking, you can pay any person’s medical expenses or educational expenses without IRS raising eyebrows against that. For as many people as you desire and you don’t even have to know them. The only stipulation IRS has for you in this regard is that the money or your check must go directly to the institutions (medical and/or educational) and not to the person or anyone else. The amount can be unlimited. The payment for education has to be for tuition and books etc. and not for room and board. IRS also ruled in 2006 that tuition bills could be paid now 5 years ahead of time.
Most families have heard of 529K plans. All states have them but not all states have good plans. I have advised many families who opened a 529K account, rightfully so, as soon as their baby was born. This way they get the most advantage of getting the money to grow until the time when the baby is ready to go to college. In fact, I have talked to some who have opened a 529K account even before the baby is born, sort of in anticipation. I don’t know if that is a good idea but it is possible to do that. One has to be very careful to determine who is the owner of the account. There are penalties if the money is not used for the intended purpose. The beneficiary, the student that is, can be changed, too. You can also load up the 529K with 5 years’ worth of funds now but then you cannot fund more for that period. There are other avenues possible for education including Coverdale ESA, EE savings certificates, HH and I bonds, UGMAs, and UTMAs. These generally have many limitations and in general are not as good as the funds in 529Ks.
Many senior readers of this magazine have plans to transfer their assets from a foreign country, like India as an example, and they wonder what will it take to do it. In the last 10 years or so IRS has been enforcing the laws rigorously. The United States government has reciprocal arrangements with many countries. That should not discourage you if you desire to transfer your assets from those countries. All you need to do is follow the rules; they are fair and reasonable. Particularly if you have generated “capital gains” on your assets before you transfer them to USA then those gains have to be declared and taxes have to be paid on those gains in one country, whichever you choose.
The same thing goes for the interest income you earn from your investments in these foreign countries. You may have seen two declaration statements on IRS’s 1040 forms; you have to answer them truthfully when you do your taxes every year.
Wealthy families turn to creating irrevocable trusts for the purpose of reducing the net worth and it can be a good strategy. Many different kinds of such trusts are possible, but perhaps a detailed discussion is too lengthy and may not be appropriate here. These trusts are individually designed to accomplish a purpose, the end result is it would benefit the next generation and also will remove the assets from the donor’s estate. The documents must be done right and legal advice is recommended. It is worth the cost.
Life insurance is an effective way of accomplishing the transfer of assets in an inexpensive way. It is one of the popular instruments for transfer and all benefits go to the beneficiary. If done properly, the benefits are tax-free.
It is definitely possible to transfer your assets to the next generation while we are still here. That way you get to see the fruits of your hard work and your assets being used and applied well. There is much satisfaction in that.
A word to the wise: take care of your needs first – present and future. Do not even think of giving any assets away if you need them for yourself and that includes giving to charity as well. Charity of your own welfare comes before anybody else’s!
I welcome any questions on this article or the previous ones, also the suggestions for any future financial subjects of your interest that you would like to know more about.
