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Strategies Surrounding the Science of Wealth Transfer: Part 3

Aug 25, 2023 | The Baum Jackson Investment Group


The decision to transfer wealth is unique to everyone. The one thing that is consistent is the proactivity that is required to do so efficiently.

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At this point, we will assume that you have been following our multi-part blog series, and we will move directly into the content. If you haven’t, please read the preceding two blog posts. 

The science of wealth transfer, as we define it, pertains to the financial decisions that go into moving wealth from one generation to the next.  As we review different examples, we want to make it abundantly clear that there is no one-size-fits-all solution. The decision to transfer wealth, and the method and timing of doing so should be considered on a case-by-case basis. Below are several strategies to consider when transferring wealth.

Estate tax implications

A major consideration when transferring wealth is the gift and estate tax exemption, which is the amount you can transfer during your life or at your death without incurring gift or estate taxes. For 2023, the exemption amount is $12.92 million, or $25.84 million for a married couple1. Said another way, if your estate is valued at less than $12.92 million ($25.84 million for a married couple) at your death, you will not be subject to an estate tax during the asset transfer process. This amount was drastically increased during the Tax Cuts and Jobs Act (passed in December 2017) and is estimated to be reduced by more than half at the end of 2025. Due to the upcoming decrease in the exemption amount, this is a focal point for individuals who think their estate may be impacted. The aforementioned amounts are for the federal estate tax exemption; each state has their own applicable rules.

Gifting strategies (lifetime exemption and annual gifting limits)

The annual gift tax exclusion for 2023 is $17,000 for an individual and $34,000 for a married couple1. The gift tax exclusion is the amount that you may give each year to any number of individuals without triggering the need for a gift tax return or using any of your gift and estate tax exemption (see notes above). Generally, annual gifting up to the exclusion amount is a good place to start if your intent is to begin passing wealth to family/friends, and you want to have  near-term impact. 

Tax Strategies (Roth vs. Traditional IRAs)

Due to changes in the SECURE Act (signed into law December 2019), the rules for required minimum distributions (RMDs) for IRA accounts have drastically changed. Effective for IRA accounts inherited after 2019, non-spouse designated beneficiaries must fully distribute the inherited IRA account balance by December 31st of the 10th year following the year the participant dies. These rules differ for beneficiaries who are minors2. Given that the RMDs are required to be taken out over 10 years, the beneficiary will have a very different experience if they inherit traditional IRA assets as opposed to Roth IRA assets. As a reminder, traditional IRA assets consist of pre-tax dollars and will be taxed at the beneficiary’s ordinary income tax rate during the year in which the assets are distributed. Roth IRA assets on the other hand are tax-free, and the beneficiary will not be required to pay any taxes on the withdrawals. This is something that should be considered when setting up a future wealth transfer.

Irrevocable Trusts (GRATs, SLATs, ILITs, etc.)

Irrevocable trusts are unique and are drafted by a qualified estate planning attorney. Due to the intricacies, we will limit this section to a few examples of irrevocable trusts. With that said, we would be happy to discuss in more detail in a one-on-one setting, or with your attorney. 

Grantor Retained Annuity Trust (GRAT)

A GRAT is an irrevocable trust into which you, the grantor, can transfer assets and retain the right to receive – for a specified term – a series of fixed, or increasing, payments. When your annuity stream ends, your beneficiaries receive the remaining balance of the trust assets, either outright or in further trust3.

Spousal Lifetime Access Trust (SLAT)

Spousal Lifetime Access Trusts (SLATs) can provide a unique opportunity to utilize one’s gift and estate tax exemption, providing the beneficiary spouse access to those assets during their lifetime4.

Irrevocable Life Insurance Trust (ILIT)

The term “insurance trust” typically refers to a trust that is funded with life insurance proceeds on the death of the life insured5. If someone does not want to create an ILIT, a life insurance policy with a named beneficiary is another method of passing wealth to an intended recipient. 

As a generalization, irrevocable trusts are designed to assist with transferring wealth from your taxable estate in a tax-efficient manner. The downside to irrevocable trusts is the level of control that an individual gives up. 

Charitable Gifting (Donor advised funds, charitable trusts, direct gifting)

Lastly, charitable gifting is another great way to transfer wealth out of your estate if you and your family are charitably inclined. There is always the option to gift directly to an organization using assets titled in your name, but there are also other methods that could create a positive impact that will last beyond your passing.

Donor Advised Fund (DAF) 

DAFs can be setup using cash or highly appreciated securities. The tax deductibility differs by contribution type and should be discussed with your tax advisor prior to contributing. DAFs create flexibility as to how and when to contribute to a qualified charity. Additionally, DAFs offer families an easy way to get future generations involved in philanthropy6

Charitable Trusts 

These trusts can take several different forms. For instance, they could be set up as a Charitable Remainder Trust or a Charitable Lead Trust. Given the complex details for each type, we encourage our clients to discuss these available gifting strategies with us.

Above are just 5 of many examples of how wealth can be transferred from one generation to the next. As noted previously, we recognize everyone’s situation is uniquely complex and personal, so these examples are meant to be just that, examples. 

We hope that you have enjoyed this multi-part series on wealth transfer. We acknowledge, and understand, that wealth transfer is both an emotional and financial decision. We want you to know that you are not alone on this journey, and we welcome the opportunity to be included in these discussions along the way. 


Wealth planning