Estate Planning: How to Minimize Estate Taxes
Estate taxes can take a significant amount of your estate and leave your heirs with less than you intended. To minimize the estate taxes, you need to have a solid estate planning strategy in place.
What are Estate Taxes?
Estate taxes are taxes on the transfer of property after you pass away. The federal government and some states impose a tax on the value of your estate above a certain threshold. Your estate includes all your assets, including real estate, investments, retirement plans, and personal property. Estate taxes can take up to 40% of your taxable estate, leaving your heirs with less than you intended.
Maximize Your Exemptions
One of the most effective ways to minimize estate taxes is to maximize your exemptions. The federal estate tax exemption for 2021 is $11.7 million per individual ($23.4 million for married couples). That means that if your estate is worth less than the exemption amount, you won't owe any federal estate taxes. Some states also have their own estate tax exemptions, which you should consider when creating your estate plan.
A spousal portability provision allows a surviving spouse to use any unused portion of their spouse's estate tax exemption, effectively doubling the exemption amount for married couples. However, this provision is only available if you properly plan for it in your estate plan.
Irrevocable Life Insurance Trusts
An irrevocable life insurance trust (ILIT) is a trust that owns life insurance policies on your life. The trust receives the death benefit from the policy and uses it to pay estate taxes and other expenses. The benefit of an ILIT is that the life insurance proceeds are not subject to estate taxes, so they can help provide liquidity to your estate without increasing the estate tax bill.
Gifting Strategies
Gifting is another effective way to minimize estate taxes. You can give away up to $15,000 per person per year without triggering the gift tax. Married couples can give away up to $30,000 per person per year. These gifts can be made outright or in trust, and they can help reduce the value of your taxable estate.
You can also make large gifts that exceed the annual exclusion, but those gifts will be subject to the gift tax. The gift tax rate is the same as the estate tax rate, so making large gifts can be an effective way to reduce estate taxes.
Create Trusts
Trusts are legal instruments that allow you to transfer assets out of your estate and into a separate legal entity. Trusts can be used to avoid probate, protect assets from creditors, and minimize estate taxes. Some types of trusts, such as grantor retained annuity trusts (GRATs) and qualified personal residence trusts (QPRTs), can help you transfer assets to your heirs at a reduced taxable value.
Plan Early
The key to minimizing estate taxes is to plan early. The longer you wait, the fewer options you have available to you. Ideally, you should start estate planning as soon as you acquire significant assets or have children, whichever comes first. By starting early, you can take advantage of the various estate planning tools available and reduce your estate tax bill.
Conclusion
Estate planning is a complex and often emotional process, but it's essential if you want to minimize estate taxes and ensure that your assets are passed down to your heirs as you intended. By working with an experienced estate planning attorney, you can create a comprehensive estate plan that takes advantage of all available tax-saving strategies. Remember, the key is to plan early and review your plan regularly to ensure that it still meets your needs and goals.