What Is the Right Tax Strategy for Your Estate Plan?

It is important for families to plan for the future. During the estate planning process, a person or married couple may decide how different types of property or assets will be passed to their heirs while also ensuring that they will have the financial resources they need in the future. Wealth protection is a key part of estate planning, and this includes tax planning. By understanding the role that estate taxes and other taxes will play when transferring assets to family members or other heirs, a family can determine the best strategies to minimize the amount of taxes they will be required to pay, preserve the wealth they have accumulated, and ensure that it will go to future generations.

Preparing for Estate Taxes

In many cases, families may not believe that estate taxes will be a significant issue that will affect them. Since estate tax exemptions apply to the assets a person owns at the time of their death, a person who currently owns less than the exemption amounts may be unconcerned about the possibility of paying taxes. However, even a modest amount of wealth can grow significantly during a person’s lifetime. Due to compound interest, $1 million, when invested at a standard rate of return of around 7 percent, may grow to nearly $15 million over 40 years. 

Following the Tax Cuts and Jobs Act of 2017, the federal estate tax exemption was increased significantly. In 2022, this exemption is $12.06 million, meaning that estate taxes will only apply to the amount of a person’s estate that exceeds the exemption. The exemption is increased every year based on inflation. However, the TCJA is set to sunset in 2026, and the exemption amount will revert back to its previous level of $5.49 million (plus increases based on inflation since 2017). Certain states, including Illinois, may also impose estate taxes following a person’s death.

There are a variety of strategies that may be used to avoid or minimize estate taxes. In many cases, the best strategy is to reduce the value of a person’s taxable estate by gifting assets to family members. However, gift taxes will apply to large transfers, so gifts should be made strategically. In 2022, the gift tax exemption is $16,000 per recipient or $32,000 per recipient for gifts given from a married couple. If a person or couple has multiple family members or other expected heirs, they may be able to give multiple gifts each year, which may help lower the value of their estate and reduce the amount of estate taxes that will apply after their death.

The value of an estate may also be lowered through the use of irrevocable trusts. There are multiple types of trusts available, including grantor retained annuity trusts (GRATs) and spousal lifetime access trusts (SLATs). Intentionally defective grantor trusts (IDGTs) may be used to pay income taxes while allowing assets to increase in value. Qualified personal residence trusts (QPRTs) may be used to maintain ownership of a home while ensuring that a person will have the resources to pay for ongoing living expenses. Irrevocable life insurance trusts (ILITs) can be used in conjunction with life insurance policies to provide a family with the resources to pay estate taxes following the death of the policyholder.

Contact Our Naperville Estate and Tax Planning Lawyer

At The Gierach Law Firm, we can answer your questions about estate taxes or other taxes that you and your family may need to address. We can help you put plans in place to minimize the taxes you will be required to pay while ensuring that you will be able to transfer wealth to future generations while also providing for your own needs throughout your lifetime. Contact our DuPage County estate planning attorney at 630-228-9413 to learn more about our services.

Sources:

Nerdwallet

Forbes

Investopedia