Create an Estate Plan That Helps You Save on Taxes Now

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Creating an estate plan that will reduce taxes now must consider several things. You will need to find ways to reduce your taxes now to keep more money in your pocket, and you must find ways to reduce your beneficiaries’ taxes when they receive your estate.

Many tools are available to reduce taxes, but they must be done correctly. The laws that govern estate taxes change often, so you should consult professionals along the way.

List All Your Assets

An effective estate plan needs to include everything in your estate. Assets not covered will go through probate, where they will likely become exposed to taxes and creditors.

List all your assets, along with their present value. Identify every bank account, retirement plan, real estate, Social Security, stocks and bonds, cryptocurrency, NFTs (non-fungible tokens), vehicles, and more.

The Lifetime Gift Tax Exemption

Giving away some of your assets is an excellent way to reduce your taxes—and the taxes your beneficiaries might have when they receive them. SmartAsset says that you can give away, without any taxes, a lifetime total of $13.61 million (2024). It will be cut in half at the end of 2025, to about $6 million, plus inflation. You and your spouse can give away up to $27.22 million.

Giving away assets can still result in gift taxes under some circumstances. You can give gifts valued up to $18,000 yearly tax-free to as many people as you want. You and your spouse can give gifts to the same person up to $36,000, but anything over that limit will require taxes.

Give Gifts to Minors

Gifts to minors need to follow the Uniform Transfers to Minors Act. It varies a little depending on your state, but you still must limit gifts up to the allowable $18,000 or $36,000. All gifts up to the limit are tax-deductible.

You can put many types of gifts into this kind of account. FindLaw says that you can put the following assets into this account:

• real estate
• antiques
• cash
• patents
• royalties
• securities
• and more.

Any assets valued at more than the gift exclusion get taxed at the child’s tax rate, which you can find at the Internal Revenue Service (IRS).

Using Trusts to Reduce Your Beneficiaries Taxes

A trust is a good way to reduce your taxes and the taxes your beneficiaries need to pay. There are many kinds of trusts, and you can often design them to meet your estate planning needs.

When planning which kind of trust to use, keep in mind that Fidelity says that a revocable living trust is not a haven from taxes. The assets put into it are an incomplete gift because you controlled them at the time of death. The assets in it will be treated as part of your estate when you die.

Although the assets themselves will not go through probate, the tax value will, which will be part of the estate. Also, the trust creator must pay taxes on any gain made on the assets in the trust.

If you plan to distribute all the assets in a trust in the year of your death, it could put a huge tax bill on your beneficiaries. A large amount of assets should be dispersed slowly to ensure a smaller tax burden on the beneficiaries, but you must direct the trustee to do so.

An irrevocable trust provides shelter from taxes when the assets are put into it, and the trust has the title to them. PocketSense mentions that assets that already generated income must go into the trust post-tax—or the grantor will still owe taxes on it.

An Upstream Basis Trust

You can minimize capital gains on the assets you sell while still alive. The upstream basis trust allows you to give assets with a low or no basis to another person through a general power of appointment (GPOA). The appointment enables your assets to obtain a step-up in those assets. Someone with this power can give away or direct the distribution of the assets under their control.

The person with a GPOA can do what they want with those assets, but they can be limited when you create the trust. To prevent them from selling it for their profit, MSN says that you can appoint someone else and give them a durable power of attorney to act when needed.

Buy Life Insurance

Life insurance policies are an excellent way to help reduce the beneficiaries’ tax burdens. If many of your assets are illiquid or tied up in a family business, you can buy a life insurance policy to solve this problem. The proceeds can pay the taxes owed on the estate, which are usually due within nine months of the estate owner’s death. It also enables all your assets to stay within the estate, helping you pass them all to your heirs.

The policy can go into an irrevocable life insurance trust (ILIT). JPMorgan says that after the death, the money can be used to help prevent a forced quick sale of assets or property to pay the taxes, which would likely mean a sale at less than value.

Another way that life insurance can help reduce the taxes of a spouse after the estate owner dies is to purchase “second-to-die” (survivorship) life insurance. This policy enables the surviving spouse to not owe any taxes because of the unlimited marital deduction, but they will be due when the second spouse dies. The deduction does not apply if the surviving spouse is not a citizen of this country.

When you are ready to make an estate plan that helps you save on taxes now and later, consult with an estate planning attorney or trust attorneys to ensure that any applicable laws have not changed. They can also help you avoid common pitfalls that will foil your plans.

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