Recently, we had a conversation with a successful, self-made, now-retired client who joked his new job was doing the planning necessary to ensure his legacy would provide for both his children and grandchildren.
He is not alone. We, at C3 Financial Partners, often engage with clients and their advisors who are thinking about the future and looking for ways to optimize their wealth transfer strategies while ensuring their families are financially secure for generations to come.
One of the most effective tools at their disposal is lifetime gifting, which not only helps reduce the taxable estate for the one making the gifts, but can also (usually when combined with smart life insurance planning) benefit subsequent generations by providing future income, covering estate liabilities, and building wealth for these heirs.
At C3FP, we work with clients and their advisors on developing strategies around lifetime giving, including how to best use an individual’s annual and lifetime gift tax exclusion in conjunction with an irrevocable trust and to determine if purchasing life insurance should be considered.
Reducing Estate Taxes Through Lifetime Gifting
One of the primary motivations behind lifetime gifting is to reduce the size of an individual’s taxable estate. While the current federal estate tax exemption is at a historically high amount, it is likely going to decrease in the coming year. Additionally, many states impose their own estate or inheritance taxes. For high-net-worth individuals, decreasing the size of an estate through gifts to heirs or trusts may prevent or lessen their estate tax exposure at death.
By making gifts during your lifetime, you can transfer wealth to your heirs in a tax-efficient manner. Currently, the IRS allows individuals to make gifts up to $18,000 per recipient without triggering a gift tax ($36,000 for a married couple electing to split gifts). This exclusion provides a straightforward way to transfer wealth incrementally while also reducing the size of the taxable estate over time.
There is also the opportunity to make a more substantial gift, though it comes with some caveats. The current lifetime exemption allows an individual to give away up to $13.61 million over their lifetime without incurring gift taxes. However, this exemption is unified with the estate tax exemption, meaning any use of this exemption during a donor’s life reduces the amount available to offset estate taxes upon death.
But gifting is not just about tax efficiency—it’s also about planning for the future. By using gifts to fund life insurance policies for children and grandchildren, a donor can ensure that the wealth transferred today will continue to grow and benefit their family for years to come.
Funding Life Insurance Policies for Future Generations
There is a way to take the above strategy and maximize its benefits for the gift recipients. This involves using the annual and lifetime gift exclusions to fund an irrevocable life insurance trust (an “ILIT”) and then having the ILIT use transferred money to purchase life insurance on the life of the grantor. Upon the grantor’s death, the life insurance proceeds will be paid to the ILIT income tax-free and distributed pursuant to the terms of the trust. As the trust keeps the life insurance proceeds out of the taxable estate, the beneficiary can receive the full amount of the death benefit.
By using lifetime gifts to fund life insurance policies held in ILITs for future generations, a grantor can:
- Provide for Future Income
A life insurance policy can act as a financial safety net for children and grandchildren, helping to maintain the standard of living for heirs. This is particularly important for younger generations who may not yet have fully established their careers or built significant savings. This provides peace of mind knowing that loved ones will be financially secure, no matter what the future holds. - Pay Estate Liabilities
Even with the best planning, there may be estate tax or other liabilities due upon one’s death. The above structure can provide the liquidity needed to pay these estate or other liabilities without disrupting a family’s financial stability. The death benefit can be used to cover estate taxes, legal fees, and other expenses, ensuring that heirs can retain valuable assets such as real estate, family businesses, or investments. - Build Wealth for Future Generations
Life insurance is also a powerful wealth-building tool. In addition to providing a death benefit, certain types of policies have a cash value component that grows over time. This and the ultimate death benefit can be used as a “family bank” by children or grandchildren during their lifetime, providing them with funds for major life events such as purchasing a home, starting a business, or funding education. The cash value in these policies grows tax-deferred, and when managed properly, it can become a significant financial resource for heirs.
If you or your clients are contemplating the use of ILITs to maximize a gifting strategy, we can help. At C3 Financial Partners, we have the expertise and experience to ensure the life insurance structure supports the planning goals.
The Strategic Advantage of Combining Lifetime Gifting with Life Insurance
Lifetime gifting is a powerful tool that, when combined with life insurance, can provide significant benefits to heirs. By reducing a taxable estate, funding future income streams, paying estate liabilities, and building wealth for future generations, one can create a lasting legacy that reflects their values and priorities.
Moreover, this approach allows for flexibility in estate planning. As the tax laws change, one can adjust the gifting strategy and the funding of life insurance policies to adapt to new circumstances. This proactive approach not only safeguards a family’s financial future but also maximizes the impact of a wealth transfer strategy.
At C3 Financial Partners, we look forward to helping our clients gain clarity in their estate planning goals and objectives, confidence that they are making the right decisions as to where their legacy should go and providing coordination with their other advisors to create and implement the right plan for them.
Securities offered through Valmark Securities, Inc. member FINRA, SIPC. Investment advisory products and services offered through Valmark Advisers, Inc., an SEC Registered Investment Advisor. Representatives may transact business, which includes offering products and services and/or responding to inquiries, only in state(s) in which they are properly registered and/or licensed. C3 Financial Partners is a separate entity from Valmark Securities, Inc. and Valmark Advisers, Inc.
