Reduce Tax Burdens With Smart Estate Planning

One of the key aspects of strategic estate planning is reducing the amount of taxes you pay. You worked hard to acquire and keep the assets you accumulated over your lifetime and any money that goes to taxes is money that does not go to your loved ones. If you are like most people creating an estate plan, you want to minimize the amount of taxes your heirs have to pay as much as possible. 

“Do it yourself” estate planning services often seem appealing to individuals hoping to draft estate plans quickly. However,  these services cannot provide the comprehensive and individualized tax planning that is essential to really minimize your tax burden. There is an art to developing an estate plan that adequately meets your needs while maximizing the money transferred to heirs. 

Taxes and Your Estate Plans  

Several different types of federal and state tax may come into play during the transfer of assets to heirs. Being aware of the latest estate planning and tax laws will help guide you to avoid issues that can cause a huge tax burden. Strategic estate planning can help you now and when you are gone.

If the value of your estate exceeds the federal exemption limit, your estate will be subject to estate tax. In 2022, the federal exemption amount is $12.06 million. The state-level threshold in Illinois is $4 million. The federal gift tax annual exclusion amount is currently $16,000 per person, which could apply if you give gifts to others during your lifetime. The generation-skipping transfer tax may apply if you leave assets to grandchildren or certain non-relatives. Make sure you understand how these taxes could impact your estate planning decisions.

How to Lower the Amount Of Taxes Taken From Your Estate 

Estate taxes, gift taxes, generation-skipping transfer taxes, and other taxes can take a sizable chunk out of the assets you leave to your heirs. Here are some strategies to help minimize these tax burdens:

• Give yearly gifts during your lifetime – You can avoid paying gift taxes on assets by giving them away while you are still alive. You can give up to $16,000 per person per year without triggering a gift tax. For example, if you want to leave money to your grandchild for his or her college education, it may make more financial sense to give him or her a portion of the money each year rather than wait and leave the entire amount in your will. 
• Make use of trusts – You can create a trust to hold assets for the benefit of others. There are many different types of trusts, each with its own set of rules and benefits. Irrevocable trusts completely remove assets from your estate and can reduce your tax liability substantially. The type of trust you use will depend on your unique needs and financial circumstances.
• Carefully consider how to handle retirement plans – Retirement accounts such as 401(k)s and IRAs can be subject to both estate and income taxes. Plan properly to reduce taxes and understand how the required minimum distribution (RMD) rules will affect your decisions. Designate your beneficiaries carefully, and make sure to designate a secondary beneficiary on retirement accounts in case the primary beneficiary dies before you do.
• Support your favorite charities –  Donating to charities is a great way to reduce your taxable estate while also supporting a cause you care about. You can give money or property directly to a charity, or you can create a charitable trust.
• Consider a family limited partnership if you own a family business –  This type of partnership can help you transfer ownership of a family business to the next generation while minimizing gift and estate taxes.

Call Us for Help 

Meticulous estate planning can maximize the inheritance you leave to your loved ones. For guidance and support during the estate planning process, contact an estate planning attorney with ample experience in tax planning. It can be especially useful to work with an estate planning attorney who is also a CPA. 

Naperville estate planning lawyer and certified accountant Denice Gierach can help you develop estate plans that meet your needs and reduce your tax liability. Call our office at 630-228-9413 for a confidential consultation. 

Sources:

https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax

https://www.fidelity.com/life-events/estate-planning/asset-strategies/retirement-accounts