How to maximize wealth to the next generation?

Most Chinese people have the idea of ????leaving their property to the next generation. Not to mention families with assets worth tens of millions, even the middle class with assets of millions need to consider this issue in advance. The United States People are no exception. So, how do Americans pass on their wealth to their children to the greatest extent possible? This is a question that many immigrant friends are concerned about.

Because preparing for wealth inheritance in advance not only means paying less or no inheritance tax, it is also closely related to tax planning. Proper planning can also avoid the risk of lawsuits and financial losses when children divorce. Today I will talk to you about this issue, introduce various methods of wealth inheritance, and compare and analyze the advantages and disadvantages of various methods.

Before discussing wealth inheritance, we must first have a general understanding of several laws related to wealth inheritance in the U.S. tax code.

Inheritance tax

In order to curb excessive wealth differentiation, the United States imposes a federal estate tax on deceased high-net-worth individuals, with a tax rate of approximately 40%. In addition to the federal estate tax, some states also impose estate taxes (some are called inheritance taxes or simply death taxes). Of course, not every dollar left behind after death is subject to estate tax. There is an exemption for estate tax in the United States.

According to the latest regulations after Trump’s tax reform, the personal exemption amount and the couple’s exemption amount for the U.S. inheritance tax in 2018 are 11.2 million US dollars and 22.4 million US dollars respectively, and will be gradually eliminated later. That is to say, if your net worth is less than $11.2 million after your death, you do not need to pay estate tax. Only the portion exceeding $11.2 million will have to pay estate tax.

But you must know that inheritance tax changes frequently in the United States. Sometimes the exemption amount is large, and sometimes it is small. It depends on the social and political environment at that time, and also depends on the financial balance and expenditure of the US government at that time.

Also note that the $11.2 million estate tax exemption is for U.S. citizens and green card holders. If you are neither a citizen nor a green card holder, you do not enjoy the $11.2 million estate tax exemption. The actual The tax exemption is only $60,000.

Gift tax

U.S. law specifically stipulates that there is an annual gift exemption for property you gift to others. The annual gift exemption is US$14,000, and the lifetime exemption and estate tax are the same as US$11.2 million. . If the annual gift exemption is exceeded, gift tax form 709 must be filed and deducted from the estate tax shelter. "Others" here refers to everyone except your spouse, including children, relatives, etc. The only exception is that there is no limit on charitable donations, so you can donate as much or as little as you want. Many people ask, who pays the gift tax?

In the United States, gift tax means that the person who gives the money pays the tax, and the person who receives the money does not pay the tax. Some people also ask whether you need to pay tax on gifts from your overseas parents. In fact, the United States is a country with free capital circulation, and it especially welcomes foreign capital flowing into the United States. You do not need to pay tax on remittances sent to you by your parents in mainland China or Hong Kong and Taiwan. If your parents do not have U.S. citizenship or green card status, they do not need to pay gift tax.

Of course, if the amount of overseas funds you receive is huge (more than 100,000 US dollars), you must fill out tax form 3520 to declare, but filing does not mean that you have to pay taxes. It just means the IRS wants to know where your money comes from.

What the U.S. government needs to guard against is money laundering, and what it is particularly vigilant about is preventing funds from entering the United States for use in terrorist activities. If the money you receive comes from Middle Eastern countries, especially those countries rich in terrorists, the United States will definitely open its eyes and pay close attention to the source and flow of the money. Mainland China, Hong Kong and Taiwan are not areas that the United States pays close attention to.

Money transfers between husband and wife are not subject to the annual gift exemption. U.S. law defines husband and wife as single economic entities. There are no restrictions on the transfer of property between husband and wife, but property given to children is subject to a limit of $14,000 per year.

After introducing the laws related to wealth inheritance, let’s talk about some basic practices of American parents in passing property to their children or relatives.

How do Americans pass on property to their children?

First, take advantage of the annual gift exemption each year.

In the United States, each child can give $14,000 per year, and a joint gift from the couple is $28,000.

The common methods include: setting up a UGMA or UTMA account, the so-called guardian account. A sum of money is transferred into this account every year. This account can be used to invest in stocks and mutual funds. The money earned is taxed at the child's tax rate, which is lower. If this money is given away, it will be given away. It will not be counted as your inheritance after a hundred years and you will not have to pay inheritance tax.

But the disadvantage is that once the child reaches adulthood (18 years old), he automatically becomes the owner of the account and has complete control over the account. Moreover, the money in this account is considered an asset in the child's name and will have the most adverse impact when he/she applies for college scholarships and grants.

In addition, the tuition and medical expenses you pay for your children are not subject to the annual gift exemption. The specific method is that you write a check directly to the school or hospital instead of writing a check to the child.

Some people say that if I give cash to my children, the IRS will not detect it. But once your children deposit cash in the bank, if it exceeds US$10,000, they must declare it. If your children often deposit large amounts of cash in the bank without legal and reasonable explanations, , if not done well, it will lead to lawsuits for tax evasion and money laundering, which is not worth the loss.

Second, take advantage of the annual gift exemption to open a 529 account.

You can put in the 5-year limit at one time, that is, up to 140,000 U.S. dollars (28,000 U.S. dollars per year). Of course, once you put in the 5-year limit, you cannot put in any more money in the next 5 years. You can also release it every year or every year. The money put into the 529 must be earmarked for the children's future college or graduate studies, and the appreciation will not be subject to capital gains tax.

But if the money is used for other purposes in the future, there will be capital gains tax, plus a 10% penalty. The 529 account also has a negative impact when applying for scholarships and financial aid, but because it counts as the parent's assets, the negative impact is less than the custodial account.

Third, buy life insurance.

What kind of person is most suitable to pass on wealth to their children by purchasing life insurance? First, there are those whose assets exceed the tax-free limit and are likely to be subject to inheritance tax in the future; second, there are those who have leftover money that they cannot spend all by themselves and want to use the principle of leverage to invest their inheritance; and there are many current properties that are real estate. People who want to leave some cash to their children.

The common practice is for parents to buy insurance for themselves and list their children as the beneficiaries of the insurance, or to buy insurance for their children and then change the owner of the insurance to the children themselves in the future.

Let’s first talk about buying insurance for yourself. If your children are underage or your mortgage has not been paid off, buying insurance is a must to protect your family. If your children have grown up and your retirement plans are well done, the main purpose of buying insurance for yourself may be to maximize the assets left to your children.

If you do nothing, the assets left to your children are assumed to be 1 million US dollars, of which 500,000 US dollars are liquid assets, such as bank deposits, stocks or mutual funds. If you use part of your $500,000 in liquid assets, say $300,000, to buy life insurance, for a 50-year-old person, the $300,000 may be able to buy $1 million or $1.8 million in life insurance (depending on you) Age, gender and health status), the insurance company will pay out 2-3 weeks after the death, and there is no tax.

Of course, if you are good at investing, it is possible for $300,000 to grow to $1 million in 20-30 years, but it is not guaranteed and you may lose money. Even if your $300,000 rises to $1 million, you still have to pay taxes on the $700,000 gain. Moreover, in the unfortunate event that you do not live for another 20-30 years, your “$1 million” is an unattainable dream.

In addition to buying life insurance for yourself, you can also consider buying life insurance for your children.

On the one hand, children’s insurance is cheap and may not require a physical examination. On the other hand, buying a child a permanent insurance policy also has a cash value. The cash value is very small at the beginning, but over time, the cash value can accumulate to a considerable extent. In the future, your child can use this cash value as a down payment for a house or as a college education fund for his/her child. Your child's insurance is controlled by you before he/she reaches adulthood. When he/she grows up, you can transfer the insurance to yourself and let him/her control it.

If you do not want life insurance claims to be included in your estate, you can set up an irrevocable life insurance trust (ILIT) to be the owner and beneficiary of your own insurance. A hundred years later, the claim will go into this trust account, and your children will take money from this account as the beneficiaries of the trust.

The advantage of setting up a trust and owning insurance is that the insurance claims are not included in your estate and there is no inheritance tax. In addition, the trust has the function of protecting against lawsuits and divorce. If your children get divorced in the future, the divorced spouse cannot get money from this trust; if your children get sued, others cannot get money from this trust.

If your insurance amount is large (a few million dollars or more), or your own property has exceeded the estate tax exemption, you must set up an insurance trust. If you want to regulate how your beneficiaries receive money and don’t want your children to spend it randomly after receiving a huge claim, you’d better set up a trust.

In the trust document, you can state the way the beneficiary takes the money or the rules for spending it. For example, it can only be used for education, medical care or unexpected expenses, and cannot be used for gambling, drug abuse, etc. . With these rules, we can prevent our children from becoming bad when they have money to a certain extent.

A trust must have a trustee, who is responsible for the execution of the trust. If it is an irrevocable trust, your parents cannot be the trustee themselves. It is best to designate someone you trust to be the trustee, or find a bank to be the trustee.

Fourth, establish a trust

There are many kinds of trusts, which can basically be divided into two categories: revocable and irrevocable. Common examples of the former include living trusts and pension trusts; the latter include life insurance trusts (ILIT), dynasty trusts (DynastyTrust), etc.

A trust is simply an entity established by the grantor for the benefit of the beneficiary, and then the property is placed in this entity. The grantor stipulates in advance how the beneficiaries will obtain and use the property in the trust. A trust generally has three persons (including natural persons and legal persons): Grantor, beneficiary and trustee.

In a revocable trust, these three people can be the same person, a trinity; but in an irrevocable trust, these three people are often different. Trusts generally have a tax ID (taxid). Revocable trusts sometimes use personal social security numbers as tax IDs. Irrevocable trusts generally apply for a tax ID from the IRS.

Many people don’t know much about trust, or have only a little knowledge about it. Clients, especially high-income, high-risk doctor clients, often tell Xiaobang that they need to set up a trust to prevent others from suing them. Their biggest misunderstanding is that once they set up a trust, everything will be fine and their property will be solid. Some people think that the money put into the trust can be freely used and spent as they wish.

There are two things you must understand about trusts:

First, revocable trusts have little tax-saving function, let alone asset protection. The reason is actually very simple, just because it can be revoked at any time.

Second, the real estate planning function is an irrevocable trust, but the existing property or future property (such as life insurance) placed in it no longer belongs to you legally, and you have no right to control it. No beneficiary rights.

If you are really worried about becoming a defendant and fearing that creditors will take away your property in the future, you should set up an irrevocable trust, put the property you do not need, and name your children as beneficiaries.

This has two major advantages. One is that the property is put in at today's value. In the future, the property including appreciation will not be counted as your inheritance, so there is no inheritance tax. Second, because the property no longer belongs to you, if you are sued, others cannot get the property in the trust.

A client once established an irrevocable trust several years ago and put part of his property into the trust. The beneficiaries were his daughters. Later, he was sentenced to jail, and his company, real estate, and bank accounts were confiscated. However, the assets under the trust were safe and sound, ensuring the future living expenses of his children.

The above are the common ways for Americans to pass on wealth. Of course, every family's situation is different, and the specific method or methods you should use will vary from person to person. Want to know which wealth inheritance method is suitable for you?

Comprehensive collection by Immigration Help. Please indicate the source when reprinting.