Best Tax Strategies For Passing Wealth To Heirs

If you are a person who has assets of significant value, you want to pass this wealth on to your heirs. To do so while minimizing estate taxes and providing the assets to your heirs tax-free, it is vital you understand tax strategies that work best in these situations. Along with common strategies such as gifting and making direct payments to colleges, universities, and other educational institutions, other possibilities may exist based on low interest rates and the volatility of the stock market. If you wonder which will work best for your situation, let’s explore various strategies a bit more in-depth.


When you are consulting with your CPA regarding the transfer of wealth to your heirs, gifting should be one of the first topics you discuss in great detail. Thanks to the annual gift tax exclusion, you will have a simple way to reduce estate taxes and shift income to your heirs. In 2021, annual gifts up to $15,000 or $30,000 for married couples can be made to as many individuals or others as you wish. Since the $15,000 will be excluded from the federal gift tax, you won’t incur any gift tax liability. Also, your CPA will point out that each $15,000 given away over the course of your lifetime will reduce your estate, meaning federal estate taxes will be lower. However, your CPA will also advise you that any amount you give away that is above $15,000 will reduce your federal lifetime exemption, meaning you will likely be required to file a gift tax return with the IRS.

Direct Payments

During the course of speaking with your CPA you discover you prefer to give more than the $15,000 annual gifting limit to individuals or others, your CPA may suggest making direct payments for medical or educational purposes. While this will indirectly shift income to your heirs, this strategy is only successful if the payments are made directly to the medical provider or educational institution. Should you be a grandparent and want to help out your grandchildren, direct payments can be an excellent way to do so. For example, this strategy can be used to pay tuition directly to a college, university, boarding school, or other educational institution. However, any non-tuition expenses such as books, supplies, and room and board will not be covered. Should you make payments to a medical provider or hospital, remember that any medical expenses that have been reimbursed by insurance will not be covered.

Loans to Your Family Members

Yes, making loans to your family members is considered to be a smart tax strategy in terms of passing wealth to your heirs. When you employ such a strategy, the loaning of cash to family members will be done at low interest rates, which are then reinvested. In doing so, the plan is to reap large profits in the years ahead. Once the money is loaned to your heirs, the focus shifts to mid and long-term applicable federal interest rates. As of October 2021, these rates are .91 and 1.72, which can be locked in by your heirs for many years. Mid-term rates can be locked in for three to nine years, while long-term rates can be locked in for as few as nine years to even 20 or more years if needed. Since you want to ensure this will be the right tax strategy for you and your heirs, talk this over in-depth with your CPA.

Grantor Retained Annuity Trust

The grantor retained annuity trust, commonly referred to as GRAT, is viewed as a very low-risk strategy that may be recommended by your CPA for passing wealth to your heirs. When a GRAT is put into place, you as the donor will transfer assets to an irrevocable trust. In return, an annuity payment is received back from the trust each year. As to how this strategy helps your heirs, it does so by letting them profit long-term from their investments, as long as their returns are higher than the IRS interest rate. Currently, IRS interest rates are extremely low, making this a strategy that is very easy to do and merits great consideration on your part.

Roth IRA Conversions

Arguably the most attractive option to most people who are wanting to pass on their wealth to heirs, Roth IRA conversions make a lot of sense from various standpoints. Unlike a traditional IRA where contributions are made pre-tax and distributions are considered to be taxable income, a Roth IRA has taxes paid upfront, meaning all distributions are completely exempt from income tax. Because of this, you may want to discuss converting a traditional IRA to a Roth IRA with your CPA, since you can then roll this over to an heir.

This option is particularly popular in times when a financial crisis looms, since it offers numerous tax advantages to both you and your heirs. Once a conversion is done, it is looked at as a rollover, and the trustee of the traditional IRA transfers money from that IRA to the trustee of the Roth IRA. Upon this taking place, the account owner will pay income tax on the amount of money that is rolled over in the year the account was converted. However, this is not a bad thing, since it will let the account accumulate assets tax-free. As an added bonus, all future distributions are also tax-free, so keep this in mind when discussing this strategy with your CPA.

Since you have numerous tax strategies you can consider using to pass wealth to your heirs, knowing as much as possible about how each will pertain to your individual financial situation and goals is imperative to making the best decision for you and your heirs. Rather than rush into a decision that may have far-reaching tax implications for everyone involved, schedule a meeting with your CPA. By doing so, you can learn the pros and cons of various strategies and make a decision that will give you and your heirs peace of mind.