Top
Generational wealth transfer planning is more important than ever, as Baby Boomers and the Silent Generation are expected to pass down a combined $84.4 trillion in assets to younger generations 1 over the next two decades amid sweeping changes to the estate tax law. The bulk of that wealth (63%) is coming from Boomers, who plan to flow $72.6 trillion to heirs, while $11.9 trillion will go to charity.
Are you prepared for the potential changes to the federal gift and estate tax law that could impact gifting that will be implemented at the end of 2025? We all know that a proper estate plan requires time and effort to create the right plan that meets our clients' objectives. Wealthy individuals and advisors have been closely watching legislative developments at state and federal levels, as certain provisions in the federal Tax Cut and Jobs Act (TCJA) are set to expire at the end of 2025.
Assets used to establish charitable split-interest trusts for income beneficiaries other than a donor are generally excluded from the donor's taxable estate. When established properly such transfers are treated as completed gifts for gift tax purposes upon the donor's contribution to the trust, and now may be the time to take advantage of potential opportunities to retain more generational wealth, while creating a charitable legacy.
How can you help your clients thoughtfully prepare for these changes?
Wealth Transfer
Gift income to heirs by naming them as income beneficiaries of a pooled income fund (PIF, such as a U.S. Legacy Income Trust (LIT), or a charitable remainder trust (CRT). The 2024 gift and estate tax lifetime exemption are $13.61 million for single filers and $27.22 million for joint filers, allowing more to be distributed to heirs free of federal gift or estate tax while these exemptions remain available.
Wealth Transfer with an Irrevocable Life Insurance Trust (ILIT)
Gift an appreciated asset to a LIT or CRT to avoid capital gains tax, receive a deduction and to generate a lifetime income stream that can be used to fund insurance held outside of the estate in an ILIT.
Reduce your Estate with Gifting
With nearly $12 trillion expected to be gifted to your client's favorite charities over the next 20 years, it is vital to oversee a holistic plan and help them create a tax efficient way to help carry on their charitable giving legacy that allows gifts to be distributed well into the future.
Wealthy individuals seeking to distribute future gifts to charities may consider establishing a donor advised fund (DAF) or naming the DAF as the beneficiary of their assets upon their death. If there are other assets that can be left for family, qualified retirement plan assets and annuities may make better gifts to establish for giving as these are taxable to beneficiaries. Moreover, gifting these assets can reduce the overall estate tax burden.
Bottom line: The TCJA is set to expire at the end of 2025, and it takes time to create an advantageous plan for wealth creation for future generations and for a charitable legacy. Begin reviewing your client's estate to determine if they can take advantage of these higher exemptions and limits while they are available. Looking into the near future, two things are certain: the Great Wealth Transfer and probable tax implications.
1Cerulli Associates.
Risk Considerations
As charitable giving vehicles, PIFs, CRTs and DAFs should not be treated as, and are not designed to compete with, investments made for private gain. An intention to make a gift to charity should be a significant part of the decision to contribute. The tax consequences of contributing to a PIF will vary based on individual circumstances. Prospective Donors should consult their own tax advisors. Distributions to individual beneficiaries from a PIF or CRT are not guaranteed by any party and are subject to investment risk. An ILIT is an irrevocable trust with complex income tax, gift tax, generation-skipping transfer tax, and estate tax implications. Prospective Donors considering an ILIT should consult their estate planning attorneys.
Eaton Vance and Morgan Stanley Investment Management (MSIM) do not provide tax advice. The tax information contained herein is general and is not exhaustive by nature.
The views and opinions and/or analysis expressed are those of the author or the investment team as of the date of preparation of this material and are subject to change at any time without notice due to market or economic conditions and may not necessarily come to pass. Furthermore, the views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring, after the date of publication. The views expressed do not reflect the opinions of all investment personnel at Morgan Stanley Investment Management (MSIM) and its subsidiaries and affiliates (collectively “the Firm”), and may not be reflected in all the strategies and products that the Firm offers.
Forecasts and/or estimates provided herein are subject to change and may not actually come to pass. Information regarding expected market returns and market outlooks is based on the research, analysis and opinions of the authors or the investment team. These conclusions are speculative in nature, may not come to pass and are not intended to predict the future performance of any specific strategy or product the Firm offers. Future results may differ significantly depending on factors such as changes in securities or financial markets or general economic conditions.
This material has been prepared on the basis of publicly available information, internally developed data and other third-party sources believed to be reliable. However, no assurances are provided regarding the reliability of such information and the Firm has not sought to independently verify information taken from public and third-party sources.
This material is a general communication, which is not impartial and all information provided has been prepared solely for informational and educational purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The information herein has not been based on a consideration of any individual investor circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.
Charts and graphs provided herein are for illustrative purposes only. Past performance is no guarantee of future results. The indexes are unmanaged and do not include any expenses, fees or sales charges. It is not possible to invest directly in an index. Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Any product based on an index is in no way sponsored, endorsed, sold or promoted by the applicable licensor and it shall not have any liability with respect thereto.
This image indicates content designed specifically for Financial Advisors / Investment Professionals. This material is not to be used with the public.