You might be liable to inheritance taxes and estate taxes on money or property you inherit, but this is unlikely The majority of estates are too small to be eligible for the federal estate tax. As of the 2023 tax year, the federal estate tax is only applicable to estates valued at more than $12 92 million. In 2024, the exemption rises to $13. 61 million. Surviving spouses are exempt.
Furthermore, the majority of states do not impose either an inheritance tax, which is assessed against the recipient of the inheritance, or an estate tax, which is imposed on the estate.
Six states have inheritance taxes, and twelve states do impose estate taxes. All set their limits lower than the federal thresholds. The lowest thresholds are $1 million. The highest estate tax rates are 18%.
Estate taxes can be a significant burden for individuals and families, potentially taking a large chunk out of your hard-earned wealth. Fortunately, there are various strategies you can employ to minimize or even eliminate your estate tax liability. This guide will delve into six effective methods you can use to reduce your estate taxes and ensure a smooth transfer of your assets to your loved ones.
1. Leverage the Annual Gift Tax Exclusion
The annual gift tax exclusion allows you to gift a certain amount of money to individuals each year without incurring any gift tax liability. For 2024, this exclusion stands at $18,000 per person. This means you can gift up to $18,000 to as many individuals as you like without triggering any tax implications. Married couples can utilize gift-splitting to double this amount, allowing them to gift up to $36,000 per person without incurring gift taxes.
This strategy effectively reduces the value of your taxable estate by transferring assets to your beneficiaries while you’re still alive. However, it’s crucial to remember that exceeding the annual exclusion limit for any single individual will reduce your lifetime gift and estate tax exemption, potentially leading to tax liability upon your death.
2. Contribute to 529 Plans or Custodial Accounts
If you have children or grandchildren, contributing to a 529 plan or a custodial account can be an excellent way to reduce your estate tax burden. These accounts offer tax-advantaged growth and allow you to withdraw funds tax-free for qualified education expenses.
For 529 plans, the annual contribution limit varies by state, but you can contribute up to $18,000 annually without triggering the gift tax. Additionally, you can accelerate 5 years’ worth of annual gifts for a total of up to $90,000 per person, per beneficiary in 2024 without incurring gift taxes. However, after that, you won’t be able to make gifts under the annual exclusion to the same beneficiary for the subsequent 4 years without triggering the gift tax.
Custodial accounts, also known as Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts, offer similar benefits. While the assets in these accounts become the property of the beneficiary once you set one up, they are still considered part of the donor’s estate until the beneficiary reaches the age of majority and takes control of them.
3. Strategically Utilize Charitable Giving
Donating to qualified charities can be a fulfilling way to support causes you care about while also reducing your estate tax liability. If you don’t anticipate your spouse, family, or other beneficiaries needing the money, donating to charity can offer tax benefits in the year of your donation while simultaneously lowering the value of your taxable estate.
For example, if you itemize deductions on your annual income tax return, you can contribute to a donor-advised fund (DAF) and potentially receive an income tax deduction for the year you contributed to the DAF. From an estate tax perspective, assets left to a qualified charity upon death are deducted from a decedent’s taxable estate. You can also donate long-term appreciated securities, such as stocks, bonds, and mutual fund shares held for a year or longer, and deduct their fair market value without paying capital gains tax. However, charitable contribution deductions are subject to adjusted gross income (AGI) limits depending on the receiving charity and what you donated.
4. Implement a Comprehensive Estate Plan
Even if you don’t believe you have a significant amount of wealth, creating a comprehensive estate plan is crucial. An estate plan ensures that your assets are distributed according to your wishes and minimizes the potential for legal complications and family disputes.
Here are some key elements of a well-structured estate plan:
- Will: This legal document outlines your wishes for how your assets should be distributed after your death. It also designates an executor who will be responsible for carrying out the provisions of your will.
- Beneficiary Designations: Designating beneficiaries for your financial accounts, such as retirement accounts and life insurance policies, ensures that these assets are transferred directly to your intended beneficiaries without going through probate.
- Durable Power of Attorney: This document allows you to designate a trusted individual to manage your financial affairs if you become incapacitated and unable to do so yourself.
- Health Care Proxy: This document empowers a designated individual to make medical decisions on your behalf if you become unable to communicate your wishes.
- Living Will: This document outlines your preferences for end-of-life care, specifying the types of medical interventions you do or do not want to receive.
- Revocable Trust: This type of trust allows you to retain control of your assets during your lifetime while ensuring their smooth transfer to your beneficiaries upon your death.
5. Consider Professional Guidance
Estate planning can be complex, and navigating the various legal and tax implications can be challenging. Seeking the assistance of experienced professionals, such as estate planning attorneys, financial advisors, and tax specialists, can provide invaluable guidance and ensure that your estate plan is tailored to your specific circumstances and goals.
These professionals can help you:
- Develop a comprehensive estate plan: They can assist you in creating a will, establishing trusts, and designating beneficiaries to ensure your assets are distributed according to your wishes.
- Minimize your estate tax liability: They can help you identify strategies to reduce your taxable estate and optimize your tax situation.
- Navigate legal and tax complexities: They can provide expert advice on estate planning laws, tax regulations, and probate procedures.
6. Stay Informed and Adapt Your Plan
Estate planning is an ongoing process, and it’s essential to review and update your plan regularly to reflect changes in your life circumstances, financial situation, and tax laws. Consulting with your professional advisors periodically can help ensure that your estate plan remains effective and meets your evolving needs.
By implementing these strategies, you can significantly reduce your estate tax liability and ensure that your wealth is transferred to your loved ones in a smooth and efficient manner. Remember, estate planning is crucial for everyone, regardless of their wealth or age. Taking proactive steps now can save your family time, money, and stress in the future.
How to Minimize Estate Taxes
To reduce estate taxes, keep the estate’s total value below the threshold and the planning straightforward. For most families, thats easy. The establishment of trusts that enable the transfer of wealth can lessen the tax burden for individuals whose estates and inheritances exceed the threshold.
Using an intentionally defective grantor trust (IDGT), a sort of irrevocable trust that enables a trustor to isolate specific trust assets to separate income tax from estate tax treatment on those assets, is one method of lowering estate tax exposure. The assets can grow tax-free, but the grantor must pay income taxes on any revenue they produce. This way, the grantors beneficiaries can avoid gift taxation.
If you also have life insurance, you can lower your estate taxes. When life insurance proceeds are paid to your beneficiary, they are not subject to federal income tax. However, if the proceeds are added to your taxable estate for estate tax purposes, that could cause your estate to exceed the threshold.
To ensure that doesn’t happen, you can assign ownership of your policy to a different individual or organization, such as the beneficiary. Creating an irrevocable life insurance trust (ILIT) is an additional option.
What Assets Are Subject to Estate Taxes?
Everything that belonged to a deceased person and was valued at $12 Federal estate taxes will apply to assets valued at least $92 million in 2023. The amount is revised annually.
A number of states also charge estate taxes. Every state establishes its own tax thresholds and exclusions.
How to LEGALLY Avoid Estate Tax
FAQ
What is the best trust to avoid estate tax?
How do the very wealthy avoid estate taxes?
How can I avoid taxes on my estate?
To protect large estates and inheritances from taxes, you can gift money to loved ones each year, or use a type of trust. Follow these steps to avoid taxes on your estate.
How can I avoid inheritance tax?
To avoid the inheritance tax, you can make it so that your estate covers the tax and your beneficiary is free from paying it. An irrevocable trust may also help you avoid death taxes, but there may be other taxes that need to be paid.
How do I avoid estate taxes in Ohio?
“There are [ways to avoid estate taxes], although currently, some states do not have estate taxes,” says Ohio estate planning and probate attorney Jay E. Michael. The key to reducing your estate tax burden is effective estate planning. This article will cover some of the main strategies for avoiding estate taxes. Large estates are complicated.
How can I avoid estate tax if I gift money?
As part of how to avoid estate tax, start gifting money to family and friends – up to $15,000 per person per year, or $30,000 if married – and if you can get your estate value down below the exemption, you can avoid paying estate taxes later. Just keep in mind that these gifts do not count against your $11.58 million exemption.