Tax Planning for Estates: 4 Key Strategies
Many individuals and families prioritize reducing estate taxes. By implementing effective strategies, you can minimize the taxable estate and potentially pass on more of your assets to your loved ones and the causes you care about, ensuring the maximum benefit from your legacy. Here are four key strategies to consider:
1. Transferring assets to family members
One common strategy is to transfer assets to family members during your lifetime. This can be done through various methods, such as gifting or setting up trusts. Transferring assets can reduce your estate’s overall value, potentially lowering the tax liability. While Federal rules remain consistent, every state has its estate tax exclusions – which may inform what types of wealth transfer strategies to consider.
2. Gifting to minors and educational expenses
Another strategy is to make gifts to minors or contribute towards their educational expenses. The IRS allows for certain gift tax exemptions, which can be utilized to transfer assets and reduce the taxable estate. By gifting assets to minors or contributing towards their education, you provide for their future and potentially lower your estate tax liability.
3. Planning the timing and frequency of gifting
Timing and frequency are important considerations when it comes to gifting assets. By strategically planning when and how often you make gifts, you can maximize gift tax exemptions and minimize the impact on your taxable estate. A beneficial way to maximize gifting is to pay tuition costs directly to an educational institution or make medical payments directly to an institution, which are not subject to annual exclusion limits. Another popular strategy is to make gifts at year-end and again in January, which allows for “bunching” two years of annual exclusion gifts into a short window. Consulting with a financial advisor or estate planning professional can help you develop a gifting strategy that aligns with your goals and objectives.
4. Charitable donations for tax reduction
If you have philanthropic goals, one option to consider is setting up a charitable trust or making a charitable transfer. This ensures that a portion of your assets is dedicated to philanthropic endeavors. It benefits the charities you choose to support and can also help reduce your taxable estate.
Donating to charity offers various tax advantages. When you make a charitable contribution, you may be eligible for a deduction on your income tax return. Donating appreciated assets such as stocks or real estate can avoid capital gains taxes on the appreciation while still receiving a charitable deduction.
An excellent mechanism for avoiding capital gains is to utilize a Donor-Advised Fund, which allows funding using appreciated securities, provides an immediate tax deduction for the full benefit of the amount contributed to the fund in the year of the contribution, and allows for flexibility to initiate grants out of the account to any 501(c)3 charity at any time in the future.
Integrating philanthropy into your estate plan can be a strategic way to reduce estate taxes. By including charitable giving provisions in your will or trust, you can allocate a portion of your estate to charity, reducing the taxable value of your estate. There are various strategies for incorporating philanthropy into your estate plan, such as establishing a charitable remainder trust or creating a charitable lead trust.
Professional advice for estate tax planning
Navigating the estate tax laws and regulations can be overwhelming. However, with the help of an estate planning attorney, you can gain clarity and peace of mind. They will assist you in understanding the various tax-saving strategies, such as gifting, charitable giving, and establishing trusts, to ensure that your assets are protected, and your tax liability is minimized.
About the Author
Brian Burgess, CFP®
Lead Advisor, Brighton Jones Wealth Management
Brian Burgess, CFP helps clients live richer lives by empowering them with the tools and confidence needed to focus on their calling, knowing that their financial wellness is safeguarded.
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