Thanks to recent IRS modifications, it is now simpler to avoid federal estate taxes if your family has substantial wealth.
High-net-worth married couples who anticipated having to pay federal estate taxes upon the death of their second spouse employed a technique called “portability,” which the IRS enhanced.
The way it works is that, although a spouse may inherit all of their partner’s assets free of tax, depending on the entire value of the assets, estate taxes may become due upon the passing of the surviving spouse.
In 2022, theres a $12. 06 million gift and estate tax exemption per individual, so you won’t be subject to federal taxes for donating $12 06 million or less to your surviving children or other beneficiaries who are not spouses at death You might be required to pay estate taxes on anything above that amount.
However, the surviving spouse may choose portability, which enables them to keep their partner’s unused exemption in addition to their own, as stated by senior manager of PKF OConnor Davies in Hauppauge, New York and certified financial planner David Silversmith, CPA. That means the couple could gift $24. 12 million before estate taxes kick in.
After their partner passed away, surviving spouses had two years to choose portability, but the most recent IRS modification increases the time limit to five years, he said.
According to the IRS, the first deceased spouse must not have required an estate tax return in order for the special five-year election window to be available.
Estate taxes can be a significant burden for wealthy individuals and families. However, there are a number of strategies that the rich can use to avoid or minimize these taxes.
1. Grantor Retained Annuity Trusts (GRATs)
One of the most common strategies is to use a grantor retained annuity trust (GRAT). A GRAT is a trust that allows the grantor to receive an annuity payment for a set period of time. After the annuity period ends, the remaining assets in the trust pass to the grantor’s heirs.
GRATs are often used to transfer appreciating assets, such as stocks or real estate, to heirs without incurring any estate tax. This is because the value of the annuity payment is based on the value of the assets when the trust is created, not the value of the assets when they are distributed to the heirs.
For example, if a grantor transfers $10 million worth of stock to a GRAT and receives an annuity payment of $1 million per year for 10 years, the remaining $9 million in the trust will pass to the grantor’s heirs without incurring any estate tax.
2. Private Placement Life Insurance (PPLI)
Private placement life insurance (PPLI) is another strategy that can be used to avoid estate taxes. PPLI is a type of life insurance policy that is sold to a small group of investors, rather than to the general public.
PPLI policies can be structured to provide a large death benefit to the policyholder’s heirs, while also minimizing the amount of estate tax that is owed. This is because the death benefit of a PPLI policy is not considered part of the policyholder’s taxable estate.
For example, if a policyholder purchases a PPLI policy with a death benefit of $100 million, the policyholder’s heirs will receive the full $100 million death benefit, even if the policyholder’s estate is worth more than $100 million.
3. Charitable Remainder Trusts (CRTs)
Charitable remainder trusts (CRTs) are another strategy that can be used to avoid estate taxes. A CRT is a trust that pays a fixed income to the grantor for a set period of time. After the income period ends, the remaining assets in the trust are donated to a charity.
CRTs can be used to reduce the size of the grantor’s taxable estate, which can result in significant estate tax savings. This is because the value of the charitable donation is deducted from the grantor’s taxable estate.
For example, if a grantor transfers $10 million worth of assets to a CRT and receives an income payment of $500,000 per year for 10 years, the remaining $5 million in the trust will be donated to a charity. This will reduce the grantor’s taxable estate by $5 million, which could result in significant estate tax savings.
4. Dynasty Trusts
Dynasty trusts are a type of trust that can be used to pass wealth to future generations without incurring any estate tax. Dynasty trusts are typically created in states that have no rule against perpetuities, which means that the trust can continue indefinitely.
Dynasty trusts can be used to hold a variety of assets, including stocks, bonds, real estate, and artwork. The assets in the trust are not subject to estate tax when the grantor dies, and they can be distributed to the grantor’s heirs over multiple generations.
For example, if a grantor creates a dynasty trust and transfers $100 million worth of assets to the trust, the assets will not be subject to estate tax when the grantor dies. The assets can then be distributed to the grantor’s children, grandchildren, and great-grandchildren without incurring any estate tax.
5. Move to a State with No Estate Tax
Another way to avoid estate taxes is to move to a state that does not have an estate tax. There are currently 12 states that do not have an estate tax: Alaska, Florida, Idaho, Kansas, Mississippi, Nevada, New Hampshire, Oklahoma, South Dakota, Tennessee, Texas, and Wyoming.
Moving to one of these states can significantly reduce the amount of estate tax that you owe. For example, if you live in a state with a 40% estate tax and your estate is worth $10 million, you would owe $4 million in estate taxes. However, if you move to a state with no estate tax, you would not owe any estate taxes.
There are a number of strategies that the rich can use to avoid or minimize estate taxes. These strategies can be complex, so it is important to consult with a tax advisor to determine which strategy is right for you.
Electing portability got easier: It’s ‘almost a no-brainer’
Another change, according to Michael Whitty, a CFP who practices estate planning law at Freeborn and Peters in Chicago, is that you will no longer need to ask the IRS for guidance if you are within the five-year window. This is known as a private letter ruling.
By submitting an estate tax return within the five-year window, you can choose portability. “That’s so easy, it’s practically a no-brainer,” he remarked.
Depending on the complexity and your location, an estate tax return could cost $5,000, $20,000, or more, according to Whitty However, when you contrast that with the savings of $20400% on each million dollars of the portability exemption, it becomes quite compelling. “.
Whats more, while the current $12. The 06 million exemption is set to decrease by approximately half in 2026 when the provisions from the Republican tax legislation of 2017 sunset. The exemption will be adjusted for inflation through 2025. Whitty estimates the exemption will drop between $6. 5 million and $7 million.
Kevin Matz, a partner in ArentFox Schiff’s private clients, trusts and estates group in New York, described it as “potentially very, very significant,” adding that many more estimates could be impacted.
This Estate Attorney’s TOP 5 Strategies To Avoid Tax
FAQ
How wealthy families avoid estate taxes?
How do rich people get around inheritance tax?
How can I reduce my estate tax?
An additional way to reduce the number of assets that will be subject to the estate tax is to fund a qualified personal residence trust (QPRT). With a QPRT, you’re transferring the ownership of your home into a trust. During the trust’s term, you can continue living in your home without paying rent.
How did a billionaire avoid tax?
Our first story unraveled how billionaires like Elon Musk, Warren Buffett and Jeff Bezos were able to amass some of the largest fortunes in history while paying remarkably little tax relative to their immense wealth. They did it in part by avoiding selling off their vast holdings of stock. The U.S. system taxes income.
Should you avoid state income tax if you’re a big earner?
”A lot of people move to avoid state income tax,” Brewer said. If you’re a big earner, you could benefit from no income tax especially since the Tax Cuts and Jobs Act capped at $10,000 how much state and local taxes you can deduct from your federal taxes through 2025.
Can I Opt-Out of estate tax?
You can opt-out at any time. Thanks to tax cuts made during the Trump administration, Americans can give or hand down nearly $13 million in assets without paying federal estate tax. Only 0.2% of taxpayers have to worry about this tax, and they hire top-notch accountants and lawyers to pay as little as possible.