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Wealth Advisory & Planning

July 11, 2022

Transferring Wealth Tax-Efficiently


  • Moving significant wealth to beneficiaries doesn’t always require complex transactions.
  • Strategic estate planning often starts small with transfers detailed in the Internal Revenue Code.
  • Limit the growth of your taxable estate while growing your assets.

Fundamental planning: Start small, stay steady

When it comes to estate planning, start small and stay steady by relying on the tried-and-true techniques that have helped families transfer wealth tax-efficiently for generations.

Consistent execution of straightforward planning strategies is always a best practice. To determine the techniques that can optimally support your objectives, begin with a Goals-Based Wealth Review to assess whether your lifestyle needs are sufficiently protected. Once confident, your focus can shift from lifestyle to legacy and the pursuit of transferring wealth.

The gifting techniques outlined below can facilitate the transfer of significant wealth across multiple generations.

Education and healthcare

Unlimited payments of medical expenses made directly to a health provider or policy premiums transferred to a health insurer are accorded special status in the Internal Revenue Code.

So are payments of tuition made directly to an educational institution. These transfers are not considered taxable gifts and do not diminish an individual’s lifetime exemption amount. With rising medical costs and increasing tuition expenses, an individual could indirectly pass thousands of dollars to children and grandchildren without using his or her lifetime exemption. It is unlikely this exception will be deleted from new tax laws and should remain an option for tax-free gifting. Be aware that the exception is for tuition only, so certain other items, such as room and board, do not qualify.

Annual exclusion: $16,000

Each taxpayer may give up to $16,000 per year to an unlimited number of individuals, free of gift tax, and without using the estate tax exemption. Since education and healthcare payments receive special status, individuals may give an additional gift to someone they may have aided previously. Spouses can both make gifts to a child totaling $32,000 together.

If that child is married, and the parents feel comfortable doing so, another $32,000 could be given to the child’s spouse. Throw in grandchildren and it doesn’t take long for annual exclusion gifts to add up to hundreds of thousands of dollars, keeping a growing net worth in check.

Annual exclusion gifts don’t have to be made in cash. Giving away stock with built-in gain to family members in a lower (or even 0%) capital gains bracket can save not only estate tax but income tax as well.

A meaningful way to accelerate the benefits of the annual exclusion is to fund state-sponsored educational 529 plans. An individual or couple can fund a 529 plan with up to five years’ annual exclusion gifts upon opening so that all of the growth on the gifted assets occurs within the beneficiary’s account since inception. In 2021 this would have allowed a couple to gift $150,000 to a new 529 plan, allowing the assets to accumulate for future educational costs. Further, this growth will escape income taxation if distributions are used for allowable education expenses. This is a straightforward strategy that saves estate and income tax.

Gifts in trust

While the annual exclusion can be given to anyone, not everyone is prepared to receive such gifts. Perhaps the intended recipient is a minor, a spendthrift, disabled or not adept at managing money. A trust can be used to protect and grow annual exclusion gifts for future use. Consistent gifting of the annual exclusion amount to a beneficiary from the time of birth could result in assets of over $1 million by the time the beneficiary reaches their early 20s. By making the gifts in trust, benefactors need not worry the recipient(s) will spend the monies unwisely.

Depending on the grantor’s age, health and long-term intentions, annual exclusion gifts to a trust might be further leveraged through the purchase of life insurance on the life of the grantor. Life insurance policies owned by properly structured trusts can receive insurance proceeds free of estate tax and produce an even larger legacy for beneficiaries.

Protect principal, gift growth

If systematic annual exclusion gifting does not distribute enough money to beneficiaries, or if you worry your estate may be subject to future taxes that would be burdensome to beneficiaries, you should consider more advanced estate planning techniques beyond annual exclusion gifts. Revisit your goals-based planning documents to determine your ability to gift assets from your portfolio without undermining your financial security. If making large gifts of principal lowers the probability of maintaining your desired lifestyle, you can consider techniques that allow you to retain ownership of principal while transferring appreciation of those assets to beneficiaries. These techniques effectively cap the growth of your estate and limit future exposure to hefty estate tax liabilities.

Intrafamily loans

This technique can be a convenient, low-cost way to assist family members with purchasing a home, starting a business or affording living costs. However, loans can also be used by the borrower to invest in the market. Loans exceeding the $16,000 annual gift-tax exemption for individuals ($32,000 for couples) should be documented with a formal loan agreement specifying repayment terms to avoid being characterized as gifts. Family lenders should consider the potential impact on family relations if loans are perceived as unfair. They must be prepared to consider the loan a gift — with potential tax consequences — if the borrower is unable to pay interest or return principal in the future.


Relatively lower interest costs, friendlier terms and more flexibility are among the potential advantages of intrafamily loans compared with commercial loans. For example, it would be difficult for a family member to get a 10-year, interest-only loan from a bank. There is also flexibility for lenders to choose to forgive interest and principal up to the annual gift-tax exemption amount without reducing their lifetime estate tax exemption, or to make a gift in the form of forgiveness of indebtedness, so long as it is not part of a prearranged explicit or implicit plan. Family trusts that are not providing current distributions can serve as a family bank, providing loans against each child’s account, if permitted by the trust instrument.


If the borrower stops interest payments or is unable to repay the loan, the IRS will consider the loan a gift. Amounts exceeding the annual exemption will trigger gift taxes or reduce the lender’s lifetime $12.06 million estate and gift tax exemption ($24.12 million for couples). So it is important for family borrowers to commit to meeting their loan responsibilities, sparing lenders the potential tax consequences. Similarly, lenders have to be prepared to consider the loan a gift, or adhere to the specified default provisions, such as foreclose on a defaulted mortgage. Borrowing from family also means not building up a credit history usually required to obtain credit cards or other commercial loans.

Using intrafamily loans preserves principal for donors, transfers appreciation to family heirs and maintains flexibility for future planning opportunities.

Grantor retained annuity trust (GRAT)

The GRAT is an efficient technique to transfer asset appreciation to beneficiaries with minimal gift or estate tax consequences without undermining the grantor’s long-term financial security. Often GRATs are designed to last two to three years to leverage historically low interest rates and market volatility.

Compared to the family loan technique, GRATs can be more effective during long periods of market volatility. If the asset values within the GRAT spike, the grantor is permitted to “swap in” more stable assets to lock in gains for future beneficiaries. Since varying asset classes often move out of step, GRATs can be created with a single asset class or even a single concentrated stock position.

Creating several GRATs at the same time can diversify exposure and increase the odds of overall success. Success is also increased by employing a short-term cascading or rolling GRAT strategy in which the grantor uses each annuity from an existing GRAT to fund a newly established GRAT. By doing this, the grantor increases the odds of capturing asset appreciation for intended beneficiaries.

A systematic GRAT program can move a substantial amount of wealth to the next generation while providing principal preservation for the grantor. Once the grantor has decided enough wealth has been earmarked for the next generation, the GRAT program can unwind and return the principal to the grantor through any remaining annuity payments.

For more information, contact your Glenmede Relationship Manager.

This presentation is intended to provide a review of issues or topics of possible interest to Glenmede Trust Company clients and friends and is not intended as investment, tax or legal advice. It contains Glenmede’s opinions, which may change after the date of publication. Information obtained from third-party sources is assumed reliable but is not verified. No outcome, including performance or tax consequences, is guaranteed, due to various risks and uncertainties. Clients are encouraged to discuss anything they see here of interest with their tax advisor, attorney or Glenmede Relationship Manager.