Reducing Estate Taxes

Estate planning can be overwhelming and can become confusing quickly. However, with proper planning and open communication, the entire family can be on board with decisions long before anyone passes away.

Responsible estate planning encompasses more than just a Will and Advance Directives. Each aspect of estate planning is important, giving adults the opportunity to have control over their bodies, quality of life, and belongings after their death. For many older adults, maximizing their estate is a crucial consideration when developing estate planning strategies. Reducing estate taxes, or “death taxes”, can eliminate large taxes that are assessed after death. With a few steps, and with some advanced planning, adults like your loved one can decrease estate taxes which could decrease the value of their estate once they pass away.

What are estate taxes?

According to the United States Internal Revenue Service, or IRS, estate taxes are a tax on your right to transfer property when you die. Property can include physical property like a home, and can also include other property like a business, cash, investments, a set of plates, or anything that you own or have rights to at the time of your death. These estate taxes are paid to the government before the rest of the estate is given to beneficiaries; this varies from inheritance taxes, which are payable by the person who receives a windfall of money from an inheritance.

Estate taxes are applied to the fair market rate of the property when the person dies. This total is called the Gross Estate and is taxed accordingly. Fortunately, the Gross Estate cost can be reduced using deduction and strategic planning. This adjusted amount is called the Taxable Estate. Ideally, your loved one should make their Taxable Estate amount as low as possible.

Currently, the estate tax exemption is $5.49 million per person. This number could seem outlandish to you or your loved one, but that number accumulates quicker than you may imagine. If your loved one owns a business, multiple properties, or has investments that could equal this amount, it is wise to begin your quest to reduce this taxable amount in the office of a financial planner or attorney. Estate tax law changed greatly at the end of 2017, when President Trump aimed to greatly reduce estate taxes. We recommend individuals to reevaluate their current estate plan, including their Will and any Trusts, regularly to see if they are outdated with regards to new laws.

Learn about your state’s estate tax laws

Before you can begin reducing the amount of the Taxable Estate, you must learn more about the estate tax laws in the state the individual lives in. Estate taxes are applied federally and by state, with each state being a bit different. Some states do not even apply estate taxes, which can make things even more confusing.

Encourage your senior loved one to make an appointment with an experienced estate planning attorney or financial planner to discuss viable options for reducing estate taxes specific to their state and situation. Even if your loved one has an estate plan and documents set up, it is still wise to review these with a financial planner annually to determine the estate value and any subsequent steps to take within the year to stay on track.

Spend money now

For most older adults, outliving their money is a major concern of aging. However, if it is possible to spend money from the estate without major anxiety, now is the time to do it. Encourage your loved one to take a dream vacation or to pay for the Bachelor’s Degree they have always wanted. Spending money on themselves now is what they have worked so hard for, and they are healthy enough to enjoy it.

Consider annual gifts

One way to begin to reduce estate taxes is to give away money yearly before death occurs. According to the IRS, individuals are allowed to give up to $15,000 each year to as many people as they want to in 2018. Giving away money not only reduces the overall value of the Taxable Estate, but also allows the individual to have the pleasure of seeing the money be received and used. Remember, this $15,000 amount is per individual, which means a married couple can give away up to $30,000 per year to each giftee. Any amount that exceeds the gift tax exemption will be taxed, with the donor paying the tax.

If your loved one has a large estate, it is a great idea to begin giving monetary gifts to children, grandchildren, great-grandchildren, or other family members while they are still alive and able to make those decisions.

It is also important to note that certain gifts are exempt from taxation. For example, paying medical bills for someone, or covering tuition for another person is exempt from gift taxes. 

Give to a favorite charitable organization

Annual donations to a favorite charity is another meaningful way to make an impact while reducing the amount of the Taxable Estate. If this seems like an option for your loved one, make an appointment with the organization of choice and develop a plan for yearly donations, along with brainstorming what the money could be used for.

Beyond annual giving to a favorite nonprofit organization, consider setting up a Trust for a larger donation after death. There are a few different ways to do this, including an option that allows for regular giving during life and then any amount in the Trust after death goes to the beneficiaries you choose.

Transfer your business ownership

If your loved one is a business owner, the business itself could end up significantly increasing the Taxable Estate amount. In order to decrease this amount, talk to an attorney and accountant about the potential benefits for signing over the business to a child or other family member in a Family Limited Partnership. If the plan is to have the business go to a family member after death anyway, choosing to expedite that process prior to death can significantly reduce the tax burden.

Set up a Trust

Money or assets within an established Trust are not taxable, making this option ideal for reducing estate taxes upon death. However, there is no such thing as a one-size-fits-all Trust that is appropriate for every situation. Talk to your estate planning attorney to discuss different types of Trust options that could protect assets and reduce taxes, while still giving the individual control over their own money.

One type of Trust that could be applicable to your situation is the Irrevocable Life Insurance Trusts, or ILITs. These Trusts allow the death benefit amount from life insurance to be taken out of the Gross Estate amount.

Dynasty Trusts are another potential solution to reducing estate taxes. These Trusts are set up to transfer money from generation to generation, but by skipping a generation each time. For example, a Dynasty Trust set up for Grandpa Bill would pass money (tax-free) to Grandchild George, skipping Son William.

Remember your home

Your home, or homes, can often be the source of an increased Taxable Estate. Quell this problem by considering if a Qualified Personal Residence Trust is a wise move for your situation. In this scenario, you essentially transfer ownership of a property to a person you choose. You are allowed to live in the home rent-free for a set amount of time. Once the time ends on the Trust, or when you pass away, the home is transferred to your named beneficiary.

Talk about it

Making any decision about estate planning should include the designated Financial Power of Attorney Agent. While the Financial POA does not necessarily need to give input or assist in the decision making process, it is still wise to include them in any meetings or updates. The Financial POA is tasked with fulfilling wishes when the individual is no longer able to, and it is best if the Agent is not caught off guard with financial or estate planning matters.

Finally, once estate plans have been established by your loved one, encourage them to have a family meeting about it. Many conflicts or confusing situations can happen when emotions are already high due to a family death. Having everyone hear the same information from your loved ones can assure everyone is on the same page with their desires and wishes.

Estate planning can be overwhelming and can become confusing quickly. However, with proper planning and open communication, the entire family can be on board with decisions long before anyone passes away. If you are wondering about your loved one’s estate plan, it is okay to ask about it. In fact, inquiring about assets and decisions can prove to be a wonderful catalyst to a document review or setting up a long overdue appointment with the attorney.


Sources:
  • Ebeling, A. (13 Feb 2018). Trusts in the age of Trump: Time to re-engineer your estate plan. Retrieved from https://www.forbes.com/sites/ashleaebeling/2018/02/13/trusts-in-the-age-of-trump-time-to-re-engineer-your-estate-plan/#6e8aa96ca231
  • IRS (9 May 2018). Estate tax. Retrieved from https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax
  • IRS (23 Oct 2017). Frequently asked questions on gift taxes. Retrieved from https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes
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