Common Gifting Strategies Of High-Net-Worth Investors

Common Gifting Strategies Of High-Net-Worth Investors

September 15, 2022
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Combining today's low gift tax rates with a historic peak in the lifetime gift tax exemption amount (currently $11.58 million), now could be a great time for high-net-worth investors to pass along assets to family members and other loved ones.1 Giving these gifts today may result in favorable tax treatment and reduce the risk that these exemption amounts will be reduced in the future. Read on for three ways high-net-worth investors can structure their gifting strategies to manage taxes and address the financial impact of each gift.

Using the Annual Exclusion Strategy

Each year, one person can give another person (or as many other people as they'd like) up to $15,000 without incurring any tax penalties. This means that a married couple can give up to $30,000 per year to their family members with no tax consequences. But while handing over cash can be a simple way to accomplish this goal, there are a few alternatives that can come with even more tax benefits.

UGMA or UTMA Accounts

The Uniform Gift to Minors Account (UGMA) or Uniform Transfer to Minors Account (UTMA) are two accounts by which a benefactor can gift money to a minor without impacting their ability to qualify for college financial aid, including subsidized loans. There are a few main differences between UGMA and UTMA accounts:

  • An UGMA account matures when the beneficiary turns 18, while an UTMA account allows the benefactor to select a maturity date from 18 to 25.
  • An UTMA account offers a broader array of investments, while an UGMA account generally consists only of cash, stocks, or annuities.
  • An UGMA account can be used for support purposes during the college years, while an UTMA account has fewer restrictions on use.2

Passing along up to $15,000 per year to these accounts can allow benefactors to boost their younger loved ones' net-worth without the potential of throwing a wrench in the college admissions process.

Grantor Trusts

A grantor trust allows the person who creates the trust to continue to own and maintain control over trust assets and property during their lifetime. Grantor trusts are revocable living trusts, which means the person who established the trust will be responsible for paying any taxes on trust proceeds during their lifetime. In other words, instead of paying these taxes from the trust proceeds themselves—thereby reducing the amount of gifted assets held in the trust—the grantor will pay these taxes outside the trust, keeping its principal intact. For those who ultimately benefit from the trust proceeds, this outside tax payment can essentially convert the trust assets into a tax-free gift.

Crummey Trusts

These trusts are often used by parents to provide financial gifts to their children, as they allow parents to benefit from the gift tax exclusion while keeping the ability to limit how and when the trust beneficiary can access the assets. Once the beneficiary turns 18, they are granted immediate access to the Crummey trust, though the parent or trust settlor can still place additional restrictions on trust assets (such as allowing the beneficiary to withdraw only the most recent gift, not prior gifts, or restricting all withdrawals until age 25). A parent who faithfully contributes the maximum $15,000 per year to a Crummey trust upon the birth of a child should be able to present this child with a tax-free $270,000 gift (assuming no investment growth) on their 18th birthday.

Each of these options can aid the tax-free transfer of wealth to family members or loved ones. A financial professional can work with you to see which option (or options) make the most sense for your unique circumstances.

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Important Disclosures:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.

LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.

1https://smartasset.com/retirement/lifetime-gift-tax-exemption

2http://www.differencebetween.net/business/finance-business-2/difference-between-ugma-and-utma/

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