Strategies keep money in the family
Money managers map out plans to minimize tax burden on heirs
As the baby boomer generation — the wealthiest batch of seniors in U.S. history — prepares for the great transfer of wealth to their children and grandchildren, financial advisers are recommending strategies to pass money to heirs with a minimal tax impact.
For money managers at Bridgeville-based Waldron Private Wealth, that means helping an increasing number of higher net worth families create and execute intra-family mortgages.
An intra-family mortgage essentially allows one family member to lend funds to another for the purchase of a home without causing a tax event. Borrowers reap the benefit of receiving a low interest rate and the loan can be structured so that it is never repaid, such as an interest-only mortgage.
“Wealthy people will do this as part of an overall strategy to transfer wealth that they will never spend during their lives,” said Mike Krol, a partner and head of wealth advisers at Waldron Private Wealth.
Even parents and grandparents of more modest means — and who cannot afford to loan their offspring the entire cost of a mortgage
— can use a similar strategy to help the kids raise money for a down payment if they want to give more than $15,000 and avoid the hassle of filing a federal gift tax return.
One drawback of loaning a child money for a down payment could be that the loan is considered debt during the underwriting process and it could affect the child’s debt-to-income ratio.
If a down payment loan does not work, parents can gift their children up to $15,000 — or $30,000 per married couple — a year without triggering the necessity of filing a gift tax return.
Taxes are a concern for the baby boomer generation — born between 1946 and 1964 — as they age and begin to pass on their assets. PNC Bank estimates about 10,000 boomers turn 65 each day and an estimated $59 trillion of wealth will be transferred.
Ahmie Baum, managing director of wealth management at Baum Consulting Group/UBS Financial Services, Downtown, said the primary method that very wealthy families transfer assets is through some form of gifting.
“That is something all families can do to the extent they have the capacity to gift,” he said.
The simplest way is for each parent to give up to $15,000 a year to whomever they wish — their children, nieces, nephews and even strangers — with no income tax consequences for either party.
Mr. Baum said tax-advantaged 529 college savings plans are another great way to gift. Annual plan contributions can be as high as $15,000 in most states, including Pennsylvania.
However, if the child does not go to college and the money in a 529 College Savings Plan is spent any way other than on college tuition and related expenses, the account owner must pay ordinary income taxes on the money plus a 10 percent additional penalty on earnings.
Families with less than $23 million in assets do not have to worry about owing any federal estate tax due to the exclusion amount being raised from $5.49 million to $11.18 million or $22.36 million per married couple
“The question for families is, ‘Do I want to transfer wealth to children while I’m alive or do I want to wait and they get it when I die?’” Mr. Baum said.
One of the most common ways the wealthy transfer money is via life insurance, said Adam Yofan, president of Alpern Wealth Management, Downtown.
“Life insurance proceeds paid at death is not taxable income, and that strategy can certainly be used by anyone at any income level,” Mr. Yofan said. “The very wealthy will pay that premium and the premium is not subject to inheritance tax or probate. However, the kid could walk away with a $1 million death benefit tax-free.
“If the parent can’t afford the premium, the child could pay it,” he said. “That’s a pretty clever thing, as morbid as it seems.
“You can put money in the stock market, which goes up and down and you have to pay taxes when you sell,” Mr. Yofan said. “Or you can buy a life insurance policy and get an income tax-free death benefit. I see this strategy used all the time regardless of wealth level.”