According to a study from Boston College in 2000, $41 trillion or more will pass from one generation to the next during the period of 1998 to 2052.1  This is based on life expectancy data and 2% real return on portfolios. However, that $41 trillion is a gross figure and after estate fees, estate taxes and charitable contributions, the figure for inheritance is reduced to $25 trillion (approximately 60%).

We have noticed a trend in financial and estate planning, where the matriarch and patriarch are concerned with issues that go beyond minimizing estate taxes and maximizing inheritances to their heirs. In many cases, these parents/grandparents wish to pass down knowledge, core family values, and maintain family harmony in addition to passing financial wealth. This may mean that a family will create an estate plan that coordinates the priorities mentioned above and is willing to forego some tax savings in order to achieve other goals.

For example, grandma may want to gift her $14K annual exclusion to each of her grandchildren to reduce her estate and potential estate taxes. However, she may know that one of her grandsons is a spendthrift. It may make sense for her to gift non-voting stock in her business instead of gifting cash to that specific grandchild. This way, wealth passes to the grandchild, but he won’t have cash on hand to spend.

Other concerns are family harmony and passing on specific values, such as charitable giving. Some families are using charitable giving as a tool to teach younger generations some valuable financial skills. Families can set up meetings and decide which charitable organizations to support and present how they came to this decision.

This method teaches the next generation to work together, do research, and decide how to best use their funds. Families can accomplish this through outright gifting, Private Foundations or Donor Advised Funds. These vehicles have different pros and cons, so please consult with your tax advisor to determine which vehicle makes sense for you.

Another example of integrating values and efficient estate tax planning is centered on school tuition. A family may value higher education and learning. As long as the tuition is paid directly to the educational institution (not giving the parents or child cash), this amount is not counted against your $14K annual exclusion or against your $5.25M lifetime exclusion.

Eligible educational institutions must meet certain qualifications and include any college, university, vocational school, other post-secondary school, or K-12 (private or public). The exemption only applies to tuition (not books, room or board). This is a great way of reducing an estate without using gift or estate tax credits. It is also a great way of benefiting a younger generation without giving them cash directly.

Each family is unique and there are several techniques that can be used to continue a family’s legacy. The first step is to take a step back and figure out what are the family’s top priorities. The second step is to make an appointment with your tax advisor to understand your specific tax situation.

1 More recent studies have confirmed that the $41 trillion number is reliable.

© Clark Nuber PS, 2013.  All Rights Reserved

This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.