The big transfer of wealth has a big fiscal impact. How to reduce the bite

The biggest wealth transfer in history is underway, and taxes can eat away at inheritances without proper estate planning, financial advisers say.

It is estimated that nearly 45 million American households will transfer more than $ 68 trillion over the next 25 years, according to Cerulli Associates. Baby boomers hold most of the wealth, thanks to a decade of stock market and real estate growth.

Estate planning is critical as significant changes have taken place, said Certified Financial Planner Michelle Gessner, Founder of Gessner Wealth Strategies in Houston.

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Here’s what families need to know when evaluating wealth transfer options.

While the Tax Cut and Jobs Act of 2017 made sweeping changes – such as reducing the top tax rate and virtually doubling the inheritance tax exemption – many provisions will expire afterwards. 2025.

Meanwhile, President Joe Biden has called for increased levies on the rich, including increasing the top tax rate, removing capital gains levies and taxing inherited property on death, between other proposals.

While the future of Biden’s program is unclear, financial experts predict higher future rates thanks to new legislation or expirations of the TCJA.

“This really makes 2021 a potentially very important year for decisions,” said Larry Harris, CFP and director of tax services at Parsec Financial in Asheville, North Carolina.

Another recent change may surprise some beneficiaries of individual retirement accounts with a smaller inheritance.

The Secure Act of 2019 put the brakes on the so-called Stretch IRA, which allowed unmarried heirs to “stretch” withdrawals over their lifetime.

The new law requires certain heirs, such as adult children, to pay off inherited IRAs within 10 years and pay taxes on those distributions. But withdrawals can push them to a higher bracket, with the possibility of a large tax bill.

A workaround, a Roth IRA conversion, changes the balance of pre-tax money to after-tax money. The owner pays direct debits at “today’s low and advantageous rates,” allowing heirs to receive funds tax-free, Gessner said.

“This is something that needs to be sorted out so that they can keep as much money as possible for their families,” she said.

Those with large IRA balances may also consider life insurance to transfer wealth, Gessner said. Homeowners can withdraw cash, pay taxes on the funds, and use the proceeds for a universal or whole life insurance policy.

Typically, heirs will receive a tax-free benefit worth two to four times what someone pays, Gessner said.

Of course, the cost of life insurance premiums depends on age, gender, location, state of health, etc. However, an advisor can collect quotes and make projections to see if and when the investment makes sense.

“It’s not one size fits all,” Gessner added.

While a person can currently transfer up to $ 11.7 million without paying federal property taxes, the exemption reverts to pre-TCJA levels after 2025, decreasing by more than half.

If someone transfers more than the limit, they may owe up to 40% estate taxes on future donations.

Affected individuals can begin to discuss giving strategies with their estate planning attorney. They need to consider what they can afford, the ability of their heirs to manage their money, and the tax implications of lifelong donations versus death, Harris said.

Depending on the size of the estate, families can also take advantage of 529 education savings plans, trusts and charitable donations to lower their estate tax bill. However, these tactics require advanced planning.

“You talk about transferring millions of dollars without any tax, inheritance or tax implications on donations,” he said. “And that opportunity may well be gone.”