When you recognize the fact that you are in possession of wealth that will potentially last for multiple generations you should consider legacy wealth planning. Many people do not understand the fact that estate taxes can return generation after generation to constantly pound away at the family wealth. This is perhaps the most important thing to address when you are engaged in legacy wealth planning.
Here in the state of New York we have a state level estate tax. The exclusion amount is only $1 million, and the maximum rate of the tax is 16%. This is a pretty big deal, but it pales in comparison to the ravages that can be wrought by the federal estate tax.
On the federal level we have an estate tax, and it carries a 40% top rate. The exclusion is $5.25 million in 2013. If you combine the two taxes you could be looking at some truly draconian taxation if you are a high net worth individual.
There are a number of different tax efficient ways that you can arrange for asset transfers to your loved ones. One possibility would be the creation of a dynasty trust, which enables two generations to benefit while only one round of taxation is imposed.
Some people use family limited partnerships to transfer assets at a tax discount. These legal devices are also useful for protecting assets from creditors and claimants.
Charitable lead trusts can be used to ultimately transfer assets in a tax efficient manner while you support causes or institutions that are meaningful to you.
It is also possible to enjoy the look on the faces of loved ones as you give tax-free gifts while you are still alive. There is a gift tax in place, and it is unified with the estate tax. The $5.25 million is a unified exclusion. If you give gifts during your life using this exclusion you reduce the amount of your available estate tax exclusion.
However, there is an annual per person gift tax exclusion. This year the amount of this exclusion is $14,000. You can give this amount to any number of gift recipients without incurring any taxation on the transfers.
There is also an educational exemption. You can pick up the tab for the tuition of students without being taxed.
A medical exemption exists as well. If you wanted to pay medical bills for someone else as a gift you could do this without incurring any gift tax responsibility. Using this exemption you can also pay for health care insurance benefiting someone else in a tax-free manner.
It should be noted that with both the educational exemption and the medical exemption you have to pay the institution or provider directly. You are not entitled to the exemption if you just give the money to the student or patient.