4 Estate Tax Planning Strategies: How to Protect Your Legacy

You’ve worked hard to preserve and grow your wealth through the years, and you aspire to transfer your financial achievements as a legacy to your family and heirs. Unfortunately, estate taxes can significantly impact the wealth you intend to pass on. 

Understanding these taxes and their importance in making estate decisions can lead to more deliberate and effective estate planning. And incorporating tax strategies into your planning efforts can help you secure and preserve your legacy for future generations to come.

Estate taxes are commonly referred to as the “death tax,” and are defined by the government as a tax on your right to transfer property at your death . Your property consists of everything you own, including cash and securities, real estate, trusts, insurance, annuities, any business interests, and other assets.

Tax laws change constantly, and the thresholds and exemptions that determine your tax liability shift accordingly. In general, estate taxes must be paid when your estate is worth more than the current year’s exemption. The 2023 federal estate tax exemption is $12.92 million per individual, or $25.84 million for married couples.

Also known as the lifetime estate and gift tax exemption, this amount will increase to $13.61 million for 2024, or $27.22 million for couples. This means that if your estate is valued less than the exemption limit at the time of your passing, your heirs won’t owe taxes on your estate.

Individual states can levy their own estate taxes in addition to federal taxes, and some states may also have an inheritance tax that the beneficiary must pay. It’s important to stay informed of the latest tax rules and regulations and how they can potentially affect your estate.

Estate taxes can have a substantial impact on the wealth that is passed down to beneficiaries. Without a carefully crafted estate plan, a significant portion of your assets may be taxed, diminishing the legacy that you’ve worked so hard to establish. 

Estate tax planning can be a complex process, involving a variety of strategies to help minimize the tax burden on your estate and make the most of your legacy.

Carefully reviewing your assets and liabilities is a foundational step in estate tax planning. Evaluate all your assets, including savings, investments, real estate, personal property, and business interests, as well as any existing debts and liabilities. Understanding the composition and value of your estate is important to accurately assess your potential tax liabilities.

A comprehensive overview of your estate helps lay the groundwork for your planning and allows you to make informed decisions on gifting, trusts, and other estate tax planning strategies.

Strategic gifting during your lifetime is a powerful tool in estate tax planning; both the annual and lifetime gift exemptions can help reduce the taxable value of your estate. Gift tax applies to the transfer, by gift, of any type of property, and is generally only paid on the amount that exceeds the lifetime exemption.

The annual gift exemption allows you to gift up to a certain amount each year to any individual; taking advantage of this exemption enables you to transfer your wealth gradually, without any tax implications. The annual gift exclusion before taxes are triggered in 2023 is $17,000 per person, or $34,000 for a married couple (in 2024, this amount will increase to $18,000 for individuals and $38,000 for married couples.) This exclusion is per gift, per recipient , not the total amount of all your gifts: for every family member or individual you wish to gift, you can give each one an amount up to the annual exclusion.  

If you gift over the annual gift exclusion, the excess amount is added to your lifetime estate and gift exemption. Once you’ve exceeded your lifetime exemption, you may be subject to taxes. 

The benefit of the lifetime exemption is that it enables you to gift larger amounts and assist with costly expenses like higher education or the purchase of a home, without incurring tax liability.

Trusts are another key component of estate tax planning strategies, as they offer unique features that help minimize the tax burden on your heirs. There are various types of trusts available, and understanding their distinctions and how they may complement your individual objectives is an essential part of estate planning.

In general, irrevocable trusts can offer asset protection by removing designated assets from your taxable estate. Your assets are held and distributed according to specific terms in your irrevocable trust, essentially shielding them from estate taxes. Irrevocable trusts include irrevocable life insurance trusts (ILITs), Grantor-retained annuity trusts (GRATs), spousal lifetime access trusts (SLATs), and qualified personal residence trusts (QPRTs).

Be mindful that irrevocable trusts are irrevocable – once set up, making any changes to the trust can be a complicated process. Irrevocable trusts also require you to give up control of those assets that are transferred into the trust, so it’s important to carefully consider the way you want to structure your trust.

Revocable trusts offer more flexibility and control during your lifetime, but any assets within these trusts are still considered part of your taxable estate. While there are no tax advantages like with irrevocable trusts, revocable trusts establish a seamless transfer of assets upon your passing, and simplify the distribution process by allowing your heirs to avoid probate.

Creating a family limited partnership (FLP) can help minimize estate tax for family-owned businesses or assets by establishing a general partnership with your heirs and family as limited partners. FLPs allow you to transfer your assets while still retaining control over them, but your partners will own a portion of these assets. An FLP will decrease the size of your estate and can help preserve family wealth.

Charitable giving allows you to give back to society, and make an impactful contribution to your community or to causes that are meaningful to you. Through your charitable giving, you can also benefit from valuable tax advantages, as your charitable donations can reduce your taxable estate.

As part of your estate tax planning strategy, you can consider establishing donor-advised funds (DAFs), charitable trusts, or private foundations. These charitable giving strategies can further enhance the tax efficiency of donating to charitable organizations, and help you create a lasting legacy of goodwill and making a difference.

Estate planning is an integral part of your financial planning, helping to protect and preserve your wealth for future generations. Carefully implementing estate tax planning strategies that are right for your objectives can ensure that your legacy endures for many more years.

Working with a financial professional can help you navigate the changing landscape of tax laws and the complexities of estate planning. At Five Pine Wealth Management , we are fiduciary advisors who work alongside you to develop a holistic financial and estate plan that is tailored to your needs, risk tolerance, and goals. We will always have your best interests in mind with every recommendation we make. To see if we can help you, please email us or call: 877.333.1015.

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