How to Transfer Wealth Without Paying Taxes
Someday, each of us will pass out of this life and into the next or nothingness, depending on your beliefs. You can’t take your wealth with you, but you can leave it for your spouse or children, so they can continue to live as they did while you lived.
Of course, you want the money to all go to your family or other beloved. The Internal Revenue Service (IRS) also wants the percentage of that due to the federal government to help care for the roads your family drives, the public schools they attend, and the parks in which they enjoy hiking, fishing or romping.
How to Transfer Wealth Without Paying Taxes
You probably aren’t worried about whether the parks service can pay for its rangers when you plan for your impending demise. Instead, you worry about whether your kids can pay for college. With that in mind, you probably start thinking like your inner Al Capone. His little voice tells you to find a way to avoid paying those taxes, or rather, the help your spouse and children avoid paying taxes on any of the wealth you transfer.
While I would typically say you should avoid thinking like Capone in most aspects, I agree with him on this one point. It does make sense to shelter the money and property you want to leave to your beneficiaries from taxes. Unlike good ole Al, may he rest in peace, I suggest you pay your taxes while you’re alive and use legal, above board means, such as tax shelters and trusts to quickly transfer wealth tax-free to your loved ones.
Legal Ideas for Tax-Free Wealth Transfer
Let’s go over the totally, completely, utterly legal options first. I do have a few suggestions that some will consider riding the fence, but they work. Just don’t misuse them.
Trust freezing
Forget the Capone scenario when you read the term trust freezing. This does not in any way involve sticking bodies in a meat locker to keep the smell from getting to people. Trust freezing refers to establishing a trust that lets you transfer real property assets to your beneficiaries and in the process, avoid them paying federal estate tax.
Stock options
Take part of your compensation in stock options. You still earn money, and it can grow as the company increases in value, but the real benefit is that you or your family once they inherit it, decide when to incur taxes on it, since you only get taxed when you sell the stock.
Found a corporation
You can incorporate yourself. Essentially, you become a brand. Many people in higher income tax brackets use this option because corporations pay fewer taxes. The more money you earn, the more this option becomes appealing. It is perfectly legal, you still pay taxes, and you leave something tangible that provides a legacy to your heirs.
Equity swap
The term equity swap refers to an agreement in which two legal parties exchange gain and loss of assets, but without ownership transfer. You’ve probably done this between departments in your company with personnel, if you ever had someone from human resources trade for the day or week with someone in finance to work on a joint project. It’s the same concept.
Give gifts
You can give each beneficiary a monetary gift each year. Choose money, stock, bonds, CDs, etc. The IRS sets a limit of $17,000 each year. This changes from year to year, so check the IRS website to learn the current tax year’s maximum.
You can give $17,000 to each individual in your family, each of your friends, each charity you love, etc. You get to feel good about life and doing good while avoiding taxes on the money yourself and giving it in such a way that the other party, the recipient, also avoids paying taxes on it. Snazzy, eh? So, let’s say you know that you’re nearing “the end.” You want to leave $150,000 to each of your three children. You can spread that out and provide them $17,000 each year, explaining what you’re doing first so they understand what they’re getting now, what they otherwise would have had to pay taxes on much later.
Purchase a luxury item or second home
Buy a yacht or some such awesome vehicle. Jewelry, a second or third home, etc. all qualify in this aspect. They benefit you now by letting you pay less in taxes, and they transfer easily to your beneficiaries later.
Deferred compensation
You can put part of your payday in a deferred-compensation plan, instead of taking it all at once.
Capital gains tax
A tax on the profits from a sale of non-inventory assets originally purchased for a lesser amount, such as stocks, bonds, property.
Direct payments
While the $15,000 per year maximum seems like a
lot of money to some, it doesn’t cover much for others.
Perhaps you have a child with special needs.
You want to make sure they have the proper care.
The federal government provides you with a tax-free way
of doing just that. You can make direct payments to
an institution or organization to pre-pay for costs.
You can do this with institutions of higher education
or medical facilities. You can also pre-pay for at-home
qualified medical care. You can use this for other
educational expenses, too. Contact the school your
child attends or will attend.
In most cases, they will let you pay tuition in advance.
This lets you avoid gift tax consequences.
You must pay the institution directly though.
Roth IRA conversions
Convert some or all of your traditional IRA assets to Roth IRAs. You will pay a tiny bit of tax the year you convert, but then the money gets to grow tax-free. When you pass away, it also gets distributed to your beneficiaries tax-free.
Life insurance
Life insurance seems like a no-brainer, but many people forget about it. You can purchase million dollar policies rather easily. Some of these you purchase for a finite term, called term life. Others you pay into as long as you live, called permanent or whole life. You can also open a whole life policy with a cash value account that lets you provide a guaranteed at-death benefit to your family or another beneficiary while also creating an investment account tax-free. You can borrow from the cash value account, but you will pay taxes at the time you borrow. If you leave it to grow until your death, your beneficiaries won’t pay taxes on it.
Let’s Cover the Murkier Waters Now
You may read about some of these in John Grisham novels. They aren’t fictional though and do actually provide a way for your beneficiaries to avoid paying taxes at the time of wealth transfer. Some of them lower your tax bill now, too.
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From the outside, this company looks real. It only exists on paper though. This type of business does not make anything or provide a service. It exists only for the purposes of funneling money through it. This lets you avoid paying state and federal taxes on that money now and protects your heirs from paying estate taxes on it later.
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You can register your business with a country overseas and officially run your business from that location. Choose one with very low taxes. You can also place just your money in a haven by opening a bank account on foreign soil. The latter is one of the reasons people love Switzerland and the Cayman Islands so much. Let’s face it; plenty of places exist to dine well and ski or dine well and play on a beach. Those two countries protect your assets, and their federal laws essentially include refusals to cooperate with other countries’ federal laws.
Why This All Matters So Much
In about seventy percent of the wealth transfers, the family loses assets because of the heirs’ financial literacy. Because they don’t know how to manage money, they lose money.
Learning More With Goalry
Why stop now? You just learned a little bit of what the Goalry family of financial websites provides. Sign up for a free member key. Let us help you learn the financial ropes. We can help you learn how to protect your finances and help your children learn how to manage the money they will inherit.
You can help them by consulting an attorney and certified public accountant now. They can help you set your legacy goals and objectives. Your top priority should be maximizing wealth transfer in a tax-free manner. That’s because people pay about one-third of their income in taxes. If you are in a higher tax bracket, imagine leaving each child $1 million. Now, imagine that instead of keeping that million, they immediately need to pay about $333,000 of it to the IRS.
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Your pre-planning can help avoid that. They can get and keep the full million dollars. That matters when you’re expecting the amount to see them through specific goals of their own or to last them a specified amount of time.