Estate Planning

Funding Education Expenses for the Next Generation: 4 Tax-Efficient Strategies

Funding Education Expenses

As the cost of college tuition continues to rise, many people are looking for ways to reduce these expenses. And if you’ve accumulated significant savings, you may be seeking tax-efficient ways to transfer your wealth to the next generation. Funding education expenses for your younger family members can be a great way to achieve both objectives. 

Taxes on Gifts

Unfortunately, gifting large sums of money to family members often comes at a cost. Currently, you can gift up to $16,000 annually ($32,000 per couple) per beneficiary without triggering the federal gift tax. The IRS also imposes a generation-skipping transfer tax (GST tax). This tax discourages people from deliberately skipping the next generation in their estate plan in favor of younger generations.

Indeed, these taxes can be a headwind for assisting younger family members financially. Fortunately, there are strategies you can use to transfer wealth without incurring a hefty tax bill—especially if your younger family members seek higher education. 

Consider these four tax-efficient strategies to fund education expenses:

Strategy #1: Fund Education Expenses Directly

One of the simplest ways to fund your family’s education expenses is to pay the educational institution directly. First, you’ll avoid gift and GST taxes. In addition, the amount won’t count towards your annual exclusion or lifetime exemption. 

Notably, this strategy doesn’t limit you to funding college-related expenses. You can pay for any level of education for your family members tax-free, so long as you write the check directly to the institution. 

Strategy #2: “Superfund” a 529 Plan

A 529 plan is an investment account that offers certain tax advantages if the funds go towards qualifying education expenses. Currently, you can contribute up to the annual exclusion amount each year without incurring the gift tax. 

In addition, many people don’t realize that you can contribute up to five years of gifts at once, per beneficiary. Meaning, in 2022 you can contribute up to $80,000 ($160,000 per couple) to a 529 plan at one time. That money can then grow tax-free until the beneficiary is ready to withdraw it.

It’s important to note that the tax treatment of 529 plans varies by state. To avoid unintended tax consequences, be sure to speak with your financial advisor before using this strategy. 

Strategy #3: Make Annual Tax-Free Gifts

If you can’t “superfund” a 529 plan, you can make annual contributions up to the annual gift exclusion limit tax-free. Alternatively, you can fund a Uniform Transfer to Minors Act (UTMA) account, an IRC Section 2503(c) Trust, or a Crummey Trust.

These accounts have similar benefits to a 529 plan but allow you to maintain more control over your gifted assets. However, these strategies can also be more complicated. It’s typically a good idea to consult a trusted advisor to determine what type of account makes most sense for you and your family.

Strategy #4: Lend Your Family Members Money

You may want to support younger family members financially without gifting them money outright. Instead, you can lend them money to pay for their education expenses.

Each month, the IRS releases Applicable Federal Rates, which represent minimum interest rates for family loans to avoid tax complications. These interest rates vary depending on the term of the loan. However, they’re typically more favorable than federal or private student loan rates. 

Funding the Next Generation’s Education Expenses

If you’ve been fortunate enough to accumulate significant wealth during your lifetime, you may be thinking about ways to pay it forward to the next generation. Since the IRS makes it difficult to transfer wealth completely tax-free, careful tax and financial planning can be beneficial. 

If you’d like to speak with a fiduciary wealth advisor about incorporating some of these strategies into your financial plan, please give us a call. We’d be happy to help. 

Benefits of a Living Trust

Benefits of a Living Trust

As your net worth increases, you may want to provide your loved ones with ongoing financial support. For some families, a living trust can be an efficient way to achieve this objective. In this article, we’re sharing the primary benefits of a living trust, particularly when it comes to streamlining your estate plan. 

What Is a Trust?

A trust is a legal arrangement between at least two people: a grantor and one or more trustees. The grantor transfers assets to the trust, which the trustee administers for the benefit of one or more beneficiaries. A trustee can be a financial institution, an advisor, or a friend or family member. 

Although there are many types of trusts, the most common is a living trust–and more specifically, a revocable living trust. In fact, about 20 percent of Americans have living trusts, according to Once a grantor creates a revocable living trust, it goes into effect immediately. In addition, the grantor can modify or revoke the trust completely during their lifetime.  

The primary benefit of a living trust is that it avoids the probate process. Probate court is where the deceased’s last will and testament is authenticated (if they have one), and their estate’s assets are located, valued, and distributed. Since there are a number of disadvantages to going through probate court proceedings, sidestepping this process altogether has its benefits. However, there are other benefits of a living trust worth considering.  

Living Trust Benefit #1: More Personal Privacy

Most states require whoever is in possession of a deceased person’s will to promptly file it with the local probate court–whether or not there will be probate proceedings. Once someone files a will, it’s a matter of public record. Meaning, anyone who is curious can see it. Since a living trust never needs to be filed with a court, it provides an additional layer of privacy.

That said, some aspects of a living trust can’t remain private, such as real estate ownership. In addition, if someone contests a living trust in court, the details of the trust become public record. Furthermore, some states require that the full terms of a trust be disclosed to beneficiaries–and in some cases, close relatives–upon the grantor’s death.

Living Trust Benefit #2: Fewer Delays in Distributing Assets

If your estate is particularly complex, probate proceedings can take months, or even years. One of the benefits of a living trust is that your beneficiaries may not experience such significant delays in the distribution of your assets when you die.

Moreover, while it’s rare for someone to challenge a living trust, it does happen. However, a trust is generally more difficult than a will to successfully attack in court. This is often the case because the grantor has ongoing involvement with the trust after its creation. As such, many courts see this as evidence that the grantor was competent to manage their affairs. 

Living Trust Benefit #3: Potential for Lower Estate Settlement Costs 

The cost of settling a living trust is typically less than settling an estate in probate court. Nevertheless, it’s important to note that a living trust is subject to a number of legal and administrative fees. So, while a living trust can reduce the overall cost of settling an estate, the savings may not be significant. This is why it’s important to consult with an estate planning expert to determine if a living trust is your best option. 

Living Trust Benefit #4: Fiduciary Oversight 

While a living trust can indeed be an effective way to carry out your end-of-life wishes, it can also be helpful during your lifetime if you become ill or incapacitated. Specifically, a living trust can help you avoid conservatorship. Instead, you can name a successor trustee, who must manage your entrusted assets as outlined in the trust documents. 

Without legal documentation, family members must go to court to get authority over the incapacitated person’s finances and medical care. Oftentimes, this is an emotional–not to mention, public–process. In addition, the person who’s named conservator may not act in your best interest. A successor trustee, on the other hand, must act in a fiduciary capacity–a meaningful distinction. 

Is a Trust Right for You?

A living trust isn’t right for everyone. However, in many cases a trust can provide you with peace of mind that your assets are protected and distributed according to your wishes–both during your lifetime and after. You should consult with a fiduciary financial advisor or estate planning attorney to determine if a living trust is the best way to accomplish your objectives. If you’d like to learn more about the benefits of a living trust, please contact us. We’d be happy to help. 

Asset Protection Strategies for the Suddenly Wealthy

Asset Protection Strategies for the Suddenly Wealthy

Sudden windfall beneficiaries typically want to protect and preserve their newfound wealth. Unfortunately, many don’t know where to start–especially as friends, family members, and opportunists attempt to capitalize on their good fortune. If you’ve recently come into a large sum of money, it’s important you keep your assets safe. In this article, we’re sharing asset protection strategies you may want to consider if you’re suddenly wealthy.

Wealth Protection Strategy #1: Strategic Asset Location

Strategic asset location can be an effective asset protection strategy for sudden wealth beneficiaries. You can avoid unnecessary taxes and protect your assets by utilizing certain account types and legal entities.

Tax-Deferred Investment Accounts

Depending on your annual income, the long-term capital gains rate on investments can be as high as 20% in 2021. However, tax-advantaged accounts like IRAs, 529 plans, and health savings accounts can help minimize your overall tax liability. 

These types of accounts typically allow you to grow your assets tax-free. In some cases, you can defer your tax liability until you need the money. 


As an estate planning tool, trusts allow you to control how and when your assets are distributed after your death. They can also be helpful if you wish to provide for younger generations without gifting them money outright. 

Trusts also offer specific advantages over a traditional will, such as privacy, tax benefits, and increased protection against legal action. While they don’t replace the need for a will altogether, they can be an effective asset protection strategy. This may be especially true if you wish to preserve your wealth for generations to come. 

Family Limited Partnerships (FLPs) and Limited Liability Companies (LLCs)

Some wealthy families choose to use FLPs and family LLCs to exclude certain assets from a taxable estate. As separate legal entities, FLPs and LLCs can help safeguard family wealth against creditors (and in some cases, divorce). 

Families who form an FLP or LLC no longer own the assets they contribute to the new entity. Rather, each participating member holds units or membership interests in the entity. 

These entities are beneficial since they generally limit member liability. In addition, you can typically discount the value of the contributed property for estate planning purposes under IRS rules. Be sure to consult an expert if you’re considering this option as laws can vary by state. 

Asset Protection Strategy #2: Asset Titling

As an estate planning tool, asset titling (legal ownership) can help protect your wealth as it transfers to future generations. Indeed, even the best estate plans can fall apart if assets aren’t titled correctly, according to J.P. Morgan

Moreover, strategic asset titling can safeguard your assets against outside predators and creditors–especially in a legal dispute. Be sure to consult your financial advisor and/or estate planning attorney as you navigate the complexities of proper asset titling. 

Asset Protection Strategy #3: Insurance

You likely have certain insurance policies already to prevent unnecessary financial losses. Still, as you accumulate more wealth, you may want to consider additional types of insurance to protect your assets. 

Umbrella Insurance

Umbrella insurance is particularly important if your sudden wealth increases your chances of being sued. It protects your assets over and above basic liability and property insurance coverage. In addition, umbrella insurance can help protect your assets against libel, vandalism, slander, and invasion of privacy–events that can deplete your assets otherwise.  

When it comes to umbrella insurance, most experts recommend a coverage amount that matches your net worth, plus your potential future income stream. However, this can vary depending on your personal circumstances and objectives. 

Cybercrime & Identity Theft Insurance

As cyberattacks and identity fraud cases become more mainstream, your risk of being a victim of cybercrime only increases. Depending on the circumstances, recovering from identity theft and fraud can be time-consuming and expensive. As such, some insurance providers offer cybercrime and identity theft insurance as an additional safeguard. 

It’s important to note that this type of insurance doesn’t necessarily reimburse victims for all stolen funds and financial loss. However, it will pay up to a specified dollar amount for financial losses directly related to your identity theft. In some cases, this insurance may also reimburse you for any expenses you incur while restoring your identity. It can also help protect your assets from future attacks. 

Cybercrime and identity theft insurance is just one of the asset protection strategies to safeguard your wealth against cyberattacks and fraud. Check out this article for additional cybersecurity best practices. 

Incorporating these Strategies Into Your Wealth Plan

It’s natural to have questions and concerns about effectively managing a sudden windfall. Working with an experienced wealth manager can help you protect your newfound wealth and preserve it well into the future. In addition, your advisor can help you determine which asset protection strategies make sense for you and your family–and implement them accordingly. 

Sherwood Wealth Management specializes in the financial planning needs of sudden wealth beneficiaries. If you’d like to speak with a fiduciary financial advisor about protecting and growing your newfound wealth, please schedule a call with our founder, Brian Littlejohn. 

What Is Estate Planning, and Why Is It Important?

What is estate planning, and why is it important?

Estate planning isn’t just for the ultra-wealthy, nor is it something you should put off until your golden years. Unfortunately, most people associate estate planning with end-of-life documents like wills and trusts. This may explain why so few Americans have an estate plan. In fact, a recent survey found that 62% of Americans don’t have a will–despite the rise in estate plans due to the Covid-19 pandemic. 

Indeed, a comprehensive estate plan helps ensure your assets are distributed according to your will when you die. In addition, it can help minimize wealth transfer taxes and protect your loved ones–especially those who depend on you financially. However, proper estate planning also ensures your wishes are honored if you become incapacitated. 

Given the many reasons estate planning can benefit you, your family, and your wealth, no financial plan is complete without it. 

5 Benefits of Estate Planning

#1: An Estate Plan Protects You and Your Assets During Your Lifetime 

If you become mentally or physically incapacitated during your lifetime, you may no longer be able to earn money or make decisions for yourself. The estate planning process includes provisions that address these risks to protect your family’s lifestyle and assets. 

For example, disability insurance can help provide for you and your family if you’re no longer able to work. In addition, it’s helpful to legally designate a healthcare proxy or power of attorney and financial power of attorney who can make decisions on your behalf if necessary. Otherwise, this responsibility may go to someone who doesn’t have your best interests in mind. 

#2: Estate Planning Allows for Efficient Distribution of Your Assets 

Without a living will or trust, your state’s probate laws will guide the distribution of your assets. The right legal documentation can save your loved ones time and frustration while honoring your intentions. 

To avoid potential conflicts among family members, it’s best to update your estate planning documents as your financial situation and family dynamics change. For example, review your designated beneficiaries on investment accounts and insurance policies regularly–and especially after a major life change. In addition, make sure your will and associated documents reflect your current wishes. 

#3: Proper Estate Planning Can Help Minimize Wealth Transfer Taxes 

There’s no way to predict what tax laws will look like in the future. Nevertheless, it’s safe to assume the IRS will want its share of your estate when you transfer it. 

If you plan to leave significant wealth to your loved ones when you die, proper estate planning is key. Wealthy families may benefit from certain strategies to minimize taxes on transferred wealth, including life insurance, Roth IRA conversions, lifetime gifting, and trusts.

For more details, check out our recent blog post: 4 Estate Planning Strategies to Minimize Taxes on Transferred Wealth

#4: An Estate Plan Can Help Protect & Preserve Family Wealth 

As people accumulate wealth, they often become the targets of frivolous lawsuits and in some cases, extortion. That’s why proper asset titling is a key component of an effective estate plan. A well-thought-out asset titling strategy can minimize your exposure to taxes and ensure your wealth transfers efficiently. It can also shield your assets from predators and creditors attempting to capitalize on your hard-earned wealth. 

Similarly, insurance can also be an important component of your estate plan. For example, life insurance and umbrella insurance can provide funds to preserve your estate or protect your wealth against a variety of legal challenges.   

#5: Estate Planning Helps Facilitate and Continue Your Legacy

Legacy planning–how you want others to remember you–is an important element of the estate planning process. For example, many people choose to donate money or assets upon their death to causes they supported during their lifetime. They may achieve their charitable goals by setting up a family foundation, contributing to a donor-advised fund, or establishing a philanthropic trust.

You may also use the estate planning process to have honest discussions with your family about the family’s wealth. In addition, you can educate younger generations to be better stewards of the wealth they eventually inherit.  

To protect your family and wealth, start planning asap

While estate planning can be an emotional process, it can also help your family avoid many of the challenges associated with settling an estate. If you’re a beneficiary of sudden wealth or have accumulated significant wealth during your lifetime, it’s best to start planning as soon as possible. 

There are many financial and legal complexities inherent to estate planning. Therefore, it’s best to seek help from a trusted financial advisor or estate planning attorney. If Sherwood Wealth Management can help you preserve your wealth and protect your family’s future, please schedule an introductory consultation