For many families, providing some form of financial security for their children is crucial. However, improper planning can significantly erode the value of these assets through taxes, potentially leading to high estate taxes. Nonetheless, you can take some savvy tax planning strategies to ensure that your children truly benefit from this wealth.
Let’s delve into the details.
When it comes to wealth inheritance, the first thing that comes to mind for many is the estate or other ways to transfer wealth to children after passing away. But starting planning today might be more helpful.
In 2026, for instance, you can gift up to $19,000 to any number of individuals (including each child) without having to pay gift tax. Married couples can combine their gifting limits, with a total maximum of $38,000. Your children won’t have to pay taxes on these gifts.
These limits are known as the Annual Gift Tax Exclusion. However, once you exceed the limit, it starts to deplete your Lifetime Gift and Estate Tax Exemption.
The 2026 Lifetime Gift and Estate Tax Exemption is $15 million for singles and $30 million for married couples. These figures will be adjusted annually based on inflation.
If the gift amount exceeds the above limits, a 40% estate tax will apply.
Furthermore, some financial experts suggest gifting assets to children during your lifetime so that you can witness their enjoyment of the assets firsthand. Additionally, your adult children won’t have to pay income tax on these gifts. Moreover, these assets may continue to appreciate in the future.
However, we’re talking about substantial wealth here. Therefore, you might also consider how your children will manage these assets effectively.
For families with substantial estates and children who may lack good financial management skills, an Irrevocable Trust might be a worthwhile consideration.
A trust is a legal entity that can hold assets such as cash, stocks, real estate, etc. You can designate your children as beneficiaries and set conditions, such as requiring them to graduate from college and have a stable job before they can receive their share.
Although you permanently relinquish ownership of the assets once transferred to an Irrevocable Trust, the benefit is that you won’t have to pay estate taxes on these assets.
Higher education costs continue to skyrocket. Setting up a 529 College Savings Plan early for your children can serve as a tax-saving strategy to help reduce college expenses.
Anyone can contribute to such accounts operated by U.S. state governments or educational institutions, and the investment earnings can enjoy federal income tax deferral.
Moreover, withdrawals for qualified higher education expenses (such as tuition, fees, and required textbooks) are tax-free.
In some cases, you may also qualify for state income tax deductions or credits due to contributing to a 529 plan.
Furthermore, the operation of a 529 plan is similar to a 401(k) plan, offering a variety of investment choices.
However, be mindful that exceeding $19,000 in contributions to a 529 plan in 2026 will use up your Lifetime Gift and Estate Tax Exemption.
You can directly pay your child’s tuition to educational institutions or medical bills to healthcare providers. The amount doesn’t matter and won’t utilize the Lifetime Gift and Estate Tax Exemption.
Custodial Accounts are savings tools established by you for underage children as beneficiaries to be managed on their behalf. The funds deposited in these accounts are irrevocable gifts, and once your children reach the legal age of adulthood (usually between 18 and 25, depending on state laws), you can transfer the funds to them.
One common type of custodial account is a UTMA account, established under the Uniform Transfers to Minors Act.
You can transfer almost any type of asset to a UTMA account, such as cash, stocks, bonds, and mutual funds.
However, the $19,000 federal gift tax exemption in 2026 applies here as well.
Additionally, these accounts may have a negative impact on a child’s future financial aid applications.
You can also jointly manage these accounts with your children to teach them the basics of saving and investing.
Leaving appreciated assets like stocks and real estate to children upon death can allow them to benefit from the tax advantage of Step-up in Basis.
For instance, if you purchased stocks of Company A for $10,000 during your lifetime and they grew to $20,000 at the time of your passing.
If you leave these stocks to your children, the new basis is $20,000. Therefore, if your children sell these stocks immediately, they would essentially not have to pay capital gains tax.
Of course, if these stocks continue to appreciate in the future, your children will only pay capital gains tax based on the new basis when they choose to sell.
Other assets that apply to Step-up in Basis include mutual funds, collectibles, artwork, etc.
There are numerous tax-efficient strategies for passing wealth onto children, each with its own pros and cons. Therefore, carefully consider how your children will benefit from these assets in the future and how they will manage them. In any case, qualified financial advisors can assist you in crafting a bespoke wealth inheritance plan tailored to your individual situation.
This article solely represents the author’s perspectives and opinions, and the content is for general informational purposes only without any intention of recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, real estate planning, or any other personal finance advice. The Epoch Times does not guarantee the accuracy or timeliness of the content.