5 Tax-Savvy Wealth Transfer Strategies

Get a jump on tax season with these tax-efficient wealth transfer techniques

Did you know that if you act by the end of December, you may be able to reduce your federal tax obligations for the current fiscal year? In fact, by adopting tax-efficient strategies that fit your unique profile, you could reduce your federal tax burden.

Consider the following five strategies to reduce your federal tax liability.

1. Contribute to your tax-deferred accounts

Unlike the other examples provided below, wealth isn't necessarily transferred to others in this strategy as much as put away for safe keeping. Yet, contributing to your tax-deductible accounts not only helps you save for the future but also may reduce your current tax bill. Until December 31, you can pay into your 401(k) for this tax year, up to the current $20,500 limit. Those aged 50 and over can add an additional $6,500 to their retirement account. For traditional IRAs, you can add funds up until April 18, 2023.

Don’t forget high-deductible health insurance plans, including your Health Savings Account (HSA), if you have one. Individuals can contribute $3,650, while families can set aside $7,300 to health savings accounts. Individuals age 55 or older can contribute an additional $1,000 in deductible contributions.1

2. Invest in the education of your children and grandchildren

Direct payments for your children’s or grandchildren’s education expenses can be a great way to transfer your wealth. Some educational institutions may allow tuition payments to be made from your account.

Be sure to make your gifts directly to an educational institution, not as reimbursements to the student or parents. You can use this strategy for any level of education. If the school permits, you may be able to prepay for multiple years.

Another option? You can consider using a Section 529 Education Savings Plan (more commonly known as a 529 plan) to set aside money for future education expenses. The law currently allows you up to five years of contributions to a 529 plan at once (for a total of up to $80,000 per person, per beneficiary in 2022) without incurring gift tax consequences. This is called “frontloading” or “superfunding” a plan, and it allows earnings on these initial contributions to be compounded over a greater period of time. However, if you choose to take full advantage of the five-year spread for 529 plans, then you would not be able to give additional gifts to that person during the five-year period without filing a gift tax return — unless the gift tax exclusion were increased, such as through an inflation adjustment in a subsequent year.

3. Give gifts of money

The federal estate tax rate is typically 40% on the largest estates. By transferring wealth to heirs over time, you may be able to reduce the size of your estate at death and avoid federal estate tax simply by giving significant gifts during your lifetime. The IRS’ inflation-adjusted numbers for the estate and gift tax exemption for 2022 means that wealthy taxpayers can transfer more to their heirs tax-free during life — or at death.

The U.S. tax code provides two options for tax-free gifting.2

The first tax-free method is the annual gift tax exclusion. The annual exclusion amount for gifts has jumped to $16,000 for 2022, up from $15,000 allowed as a tax-free gift. You can choose to give to as many people as you want during the year, with a separate $16,000 tax-free limit on the contributions to each person and no aggregate limit for you. A recipient doesn’t need to be a family member.

You can also make additional tax-free gifts using the federal lifetime estate exemption. The estate tax exemption increased to $12.06 million per individual in 2022, up from $11.7 million in 2021. If married, each spouse has a separate exemption.

If you’re looking to reduce estate tax later, giving gifts in the millions can use up your lifetime $12.06 million estate tax exemption amount. When an individual bestows multiple annual exclusion gifts of $16,000, this doesn’t count against the $12.06 million estate tax exemption limit.

It's also important to know that the generation-skipping transfer tax is imposed on certain transfers to ensure that transfers of property are subject to transfer tax at least once every generation.

In addition to federal gift and estate tax, there may also be state gift, inheritance or estate taxes. Work with your tax advisor or attorney to understand all potential tax consequences of your gifts.

4. Explore creating a trust

Creating a trust can help you transfer wealth to the next generation. There are many types of trusts to use for various goals. In one scenario, you could transfer assets from your estate to a trust, bypassing your estate and possibly lowering your estate tax. Depending on the trust, assets may be retained in the trust deferring estate tax or included in a beneficiary's estate with reduced estate tax liability. As income accrues on the assets held in the trust, you may not be personally responsible for paying taxes since the trust is considered a separate entity. The trust gets taxed directly on retained income, while beneficiaries are taxed on income distributions. If all trust income is distributed to the beneficiaries, the trust may owe no income taxes. This wealth transfer strategy typically works because beneficiaries are often in lower tax brackets. However, there are costs to creating a trust. Again, you should always consult with your own legal and tax advisor.

5. Consider philanthropy

The most common end-of-year strategy to reduce one’s tax burden is to donate cash or other assets to a qualifying charitable organization through charitable giving. It can be a lovely way to connect your wealth to work being done in the world that’s in alignment with your values and beliefs.

Depending upon the size of the gift, this may not only reduce your estate overall but also your tax bill in the current tax year. Some charities and community foundations accept donations of highly appreciated assets like stock and real estate, which can help you avoid hefty capital gains taxes.

If you’re interested in exploring these end-of-year tax-saving strategies further, be sure to reach out to RBFCU Investments Group at 1-888-294-0202 or via rbinvestments@rbfcu.org today.

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Ameriprise Financial Services has a partnership with this financial institution to provide financial planning services and solutions to clients. The financial institution is not an investment client of Ameriprise but has a revenue sharing relationship with us that creates a conflict of interest. Details on how we work together can be found on ameriprise.com/sec-disclosure.

Clients contributing to a 529 Plan offered by a state in which they are not a resident, should consider, before investing, whether their, or their designated beneficiary(s) home state offers any state tax or other state benefits such as financial aid, scholarship funds or protection from creditors that are only available for investments in such state’s qualified tuition program.

RBFCU Investments Group is a financial advisory practice of Ameriprise Financial Services, LLC.

Ameriprise Financial and the financial institution are not affiliated.

Ameriprise Financial, Inc. and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation.

Investment advisory products and services are made available through Ameriprise Financial Services, LLC, a registered investment adviser.

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1Retirement topics - 401(k) and profit-sharing plan contribution limits. (2022). Retrieved October 11, 2022, from irs.gov.

2The three ways to make tax-free gifts and why you should use them soon. (2021). Retrieved October 11, 2022, from forbes.com.