When creating or updating your estate plan, one of the key considerations should be minimizing your estate’s exposure to state an/or federal taxes. Estate taxes can significantly reduce the value of your estate, leaving your heirs with less than you intended. By incorporating effective tax avoidance strategies into your estate plan, you can preserve more of your wealth for future generations. With that in mind, a Murfreesboro estate planning attorney at Bennett | Michael | Hornsby explains several popular tax avoidance strategies for
your estate plan.
Understanding Federal Gift and Estate Taxes
The estate you leave behind may be subject to various taxes; however, the one most people worry most about is the federal gift and estate tax which is effectively a tax on the transfer of wealth that is collected from the estate of a taxpayer during the probate of the estate. The tax applies to the combined value of all qualifying gifts (almost all gifts are considered “qualifying” gifts) made during a taxpayer’s lifetime and assets owned by the taxpayer at the time of death. The American Taxpayer Relief Act of 2012 (ATRA) set the tax rate at 40 percent, meaning your estate could lose 40 percent of its value without any deductions, credits, or adjustments.
How Does the Lifetime Exemption Work?
The good news is that each taxpayer is also entitled to take advantage of the lifetime exemption to reduce the amount of taxes owed by their estate. ATRA also established the lifetime exemption amount at $5 million, to be adjusted annually for inflation. In 2018, however, the Tax Cuts and Jobs Act (TCJA) went into effect, increasing the lifetime exemption amount for 2018 through 2025. For 2024, the individual lifetime exemption amount is $13.61 million, meaning a married couple can shield a total of $27.22 million from federal gift and estate taxes. Assets above the exemption limit are subject to taxation. In addition, the lifetime exemption is scheduled to revert to $5 million (adjusted for inflation) in 2026.
The Annual Gift Tax Exclusion
The annual exclusion is an excellent tax avoidance tool that allows each taxpayer to gift up to $18,000 (as of 2024) to an unlimited number of beneficiaries each year tax-free. Gifts made using the annual exclusion do not count toward your lifetime exemption limit. When used strategically, you can transfer a substantial amount of money to your heirs over time, reducing the size of your taxable estate. For example, if you have three children, you could gift each of them $18,000 per year, effectively transferring $54,000 annually out of your estate.
Establishing a Trust
Trusts are powerful tools in estate planning that can help you manage and protect your assets while minimizing taxes. To gain tax avoidance benefits from the trust you must create the right type of trust. For example, an Irrevocable Life Insurance Trust (ILIT) removes your life insurance policy from your estate, thereby excluding the death benefit from estate taxes. The trust owns the policy, and the proceeds go directly to your beneficiaries, tax-free. Another excellent tax avoidance trust is the Grantor Retained Annuity Trust (GRAT). A GRAT allows you to transfer appreciating assets to your beneficiaries at a reduced tax cost. You retain the right to receive annuity payments for a specified term, and any remaining assets pass to your heirs, potentially tax-free.
Charitable Donations
Incorporating charitable donations into your estate plan can provide significant tax benefits. Charitable Remainder Trusts (CRTs) and Charitable Lead Trusts (CLTs) are two options that can help you reduce estate taxes while supporting causes you care about. A CRT allows you to receive income from the trust for a specified period, after which the remaining assets go to charity, reducing the taxable portion of your estate. Conversely, a CLT provides immediate support to a charity, with the remaining assets eventually going to your beneficiaries.
Family Limited Partnerships
A Family Limited Partnership (FLP) allows you to transfer assets to family members at a discounted value for tax purposes while retaining control over the assets. By gifting partnership interests to your heirs, you can reduce the value of your taxable estate. The discounts are due to the lack of marketability and control of the limited partnership interests, potentially leading to substantial estate tax savings.
Contact a Murfreesboro Estate Planning Attorney
If you have additional questions about tax avoidance strategies to incorporate into your estate plan, consult with an experienced Murfreesboro estate planning attorney at Bennett | Michael | Hornsby as soon as possible. Contact the team today by calling 615-898-1560 to schedule your free appointment.
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