By: Hughes Schwartz, CFP®, CLU®
Wealth Management Advisor
Northwestern Mutual
As you think about year-end financial housekeeping, make sure you explore gift and estate planning tax strategies, especially in a year where we saw low valuations and rising interest rates. Low valuations potentially allow you to transfer more assets to the next generation. As for rising rates, if your financial planning includes loaning funds to your children or your grantor trusts, higher interest rates can erode the effectiveness of these techniques.
Four estate planning ideas to consider before year-end:
Annual gift tax exclusion — The federal gift tax exclusion is $16,000 per donor, per donee, for 2022. The gift can include a check, a transfer of securities or a transfer of life insurance.
Education planning — College savings 529 accounts offer gift, estate and income tax benefits. The growth on a 529 account is income tax-deferred, and funds used for “qualified higher education expenses” are income tax-free and penalty-free. The definition of a qualified higher education expense has expanded to include more than just college tuition, room and board, and supplies. The definition now includes up to $10,000 for elementary or secondary schools each year, expenses for apprenticeship programs and up to $10,000 in student loan payments over the course of the individual’s lifetime.
Consider moving life insurance to an ILIT — With the gift and estate tax reversion scheduled for 2026, you might consider moving your existing policies into an irrevocable life insurance trust in 2022. When a life insurance policy is gifted to an ILIT, there is a three-year lookback rule in which the death benefit is brought back into your gross estate if you die within three years of the gift. If you survive three years and a day, it is then outside the estate. If you make the gift now in 2022, the three-year clock will end in 2025 while estate tax exemptions remain doubled.
Charitable remainder trusts — While not a new planning technique, charitable remainder trusts came back into vogue recently, thanks to the rising interest rate environment. A CRT provides for distributions to the grantor or other beneficiary during the trust term with the remainder payable to charity at the end of the trust term.
Year-end is a great time to consider how you can reduce your tax bill and revisit your overall circumstances compared to your current financial plan and objectives. Connect with a financial advisor as the year winds down to help you make sure you’re on the right track.
Hughes Schwartz is a Wealth Management Advisor with the Northwestern Mutual Wealth Management Co., Milwaukee, WI. Since 2010, he has been working with clients to create financial security by guiding them through a holistic and comprehensive financial planning process so they can leave a legacy that goes beyond wealth. This publication is not intended as legal or tax advice. Financial Representatives do not render tax advice. Consult with a tax professional for tax advice that is specific to your situation.
