For many of my clients, tax avoidance is a primary estate planning goal. Gift and estate taxes can wreak havoc on the estate you leave behind if you do not proactively take steps to avoid paying taxes. While it is not always possible to completely avoid paying gift and estate taxes, it is possible to reduce your estate’s exposure to taxes. With that in mind, let me explain 4 common ways to avoid estate taxes.
Gift and Estate Taxes
When a taxpayer passes away, the value of the estate they leave behind is subject to federal gift and estate taxes at the rate of 40 percent. Not surprisingly, no one wants to lose 40 percent of the assets they leave behind to Uncle Sam. Fortunately, every taxpayer is also entitled to deduct the current lifetime exemption amount from the total value of their estate before taxes are levied. As of 2023, the lifetime exemption amount is $12.92 million. A $15 million estate, therefore, is only taxed on $3.08 million. While the lifetime exemption certainly helps, a high-value estate can still lose a substantial amount of money to federal gift and estate taxes. In addition, the current lifetime exemption is set to revert to just over $5 million in 2026, increasing the importance of including tax avoidance tools and strategies in your estate plan.
Estate Planning Tools and Strategies that Help Avoid Estate Taxes
The estate planning tools and strategies that you incorporate into your estate plan will be based on your individual circumstances and goals; however, the following are some commonly used options:
- Lifetime gifting. While qualifying gifts made during your lifetime are taxable, gifts made using the yearly exclusion are not and do not count against your lifetime exemption. The yearly exclusion allows a taxpayer to make gifts valued at up to $17,000 (as of 2023) to an unlimited number of beneficiaries each year tax-free. By way of illustration, if you made gifts to four children each year for ten years you could transfer $680,000 tax-free.
- Irrevocable life insurance trust. Proceeds from a life insurance policy can become part of your taxable estate; however, if you create an irrevocable life insurance trust those proceeds are not taxable. The trust is created while you are alive, and ownership is transferred to someone other than you. Upon your death, the death benefits from the life insurance policy pay out into the trust. Because the trust is not part of your estate, the value of the proceeds is not taxed as part of your estate.
- Family partnership. If you own a family business, consider creating a family partnership. When structured correctly, you are able to retain control over how the business operates while also transferring some of the ownership to children, grandchildren, and other family members. As such, you own less of the business at the time of your death, thereby reducing the value of your estate and your estate’s tax obligation.
- Charitable gifts. Creating a charitable lead or charitable remainder trust can also help reduce your estate’s exposure to federal gift and estate taxes. Both trusts include both a charitable and a non-charitable beneficiary. In a charitable lead trust, the charity receives distribution for a set time with the remainder being distributed to the non-charitable beneficiary. A charitable remainder trust works the same but in reverse. With a charitable remainder or charitable lead trust you can potentially reduce estate taxes and/or capital gains taxes.
Estate Tax Avoidance? Call Chapel Hill Estate Planning Attorney
If you have more questions or concerns about what you can do to avoid estate taxes, please contact a Chapel Hill estate planning attorney at Clarity Legal Group by calling us at 919-484-0012 or contact us online.
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