All estate plans can pass your estate to your beneficiaries. Estate-planning tools can help protect as much of your assets as possible from taxes to ensure they are passed on intact.
A good estate plan should include ways to help reduce your taxes while you are still alive so that you can give more. The fewer taxes you pay while alive means you have more assets to pass on. You can reduce your estate in several ways to pay fewer taxes to give your heirs more.
Giving Gifts
One of the best ways to reduce your estate without taxes is to include giving gifts in your estate plan. Having fewer assets means your estate will have less estate tax to pay once you are gone. Gift-giving can also enable you to avoid taxes while you are still alive.Gifts up to $17,000 per person can be given to as many people as you want. Couples can give up to $34,000 in 2023 to the same person, and they do not require any gift tax. Also, you do not need to report it to the Internal Revenue Service (IRS). These gifts will not affect your lifetime gift tax exemption, which is $12.92 million for 2023 and $25.84 million for couples. Fidelity says the limit will be reduced to about $7 million when 2025 ends. It gives you ample room for gift-giving now to reduce your assets and estate taxes.
When you give away income-producing assets, CL-Law says you can receive a double benefit. You give away future income, and you also give away future appreciation—and both can result in more estate taxes later on if you retain them.
If you want to give larger gifts and still avoid the gift tax, you have several options. Some gifts may also be tax-deductible. The IRS mentions that you can give gifts without being concerned about the gift tax by giving gifts to:
- your spouse (unless he/she is not a U.S. citizen)
- charitable organizations
- religious organizations
- payments for someone else’s medical care
- tuition payments for another person
- political organizations.
Consider Real Estate Values
During your estate planning, find out if you live in a state where your beneficiaries must pay estate taxes. Some states may also have an inheritance tax, and some have both. Although the federal estate tax exemption is very high, some states have tax exemptions as low as $1 million. If so, you may need to give away more to ensure they are not hit with a huge tax bill when they receive your inheritance.In recent years, property values have risen considerably. Homeowners who have lived in their homes for years could face a considerable increase in the fair market value. Fidelity warns that people with considerable assets, large income streams, and retirement income could easily go above the exemption limit of federal or state estate tax and inheritance taxes. It is also necessary to think about the growth of your assets in the years before retirement, including your retirement plans.
Contribute to a 529 Plan
A 529 plan is an account for a minor for their education. It lets you donate after-tax money up to $17,000 per year without gift tax. Each state sets a total of how much you can contribute, ranging from $235,000 to $550,000. You can also donate five years’ worth in a single year if you want—$85,000 per person. Contributions remove the money from your estate.
The money in the account is invested in various options and performs based on those options. You can use the money for any level of education—kindergarten through college at any accredited institution, says SavingforCollege. It grows tax-deferred, and money used for tuition is withdrawn tax-free. Also, money in the plan does not interfere with obtaining financial aid.
Consider Upstream Planning
Owning property for some time usually means it is worth much more now than the purchase price. Selling it will result in potential hefty capital gains taxes. Kiplinger mentions an upstream planning strategy to resolve the problem.The strategy involves giving the property to an older family member—one who will most likely die before you do. When they die, you get a step-up basis on the property and will owe very little (if any) capital gains taxes after it sells.
An important concern is that the person you give it to must be highly trustworthy. According to the IRS code, the person you choose has power over the property to do with it what they want. It means they could take the property for themselves or give it to anyone. Creating a trust and putting the property in it could eliminate that possibility and ensure it gets back into your hands when they die.
The Generation-Skipping Transfer Tax
After 2014, transferring assets requires a flat 40 percent tax. To avoid double taxation when assets go from father to son and then from son to grandson, Congress created the generation-skipping transfer tax (GSTT). When set up correctly, the assets are only taxed once.The assets skip over the son and go directly to the grandchild—or any other designated person. In order to receive a generation-skipping gift, Investopedia says, the person must be at least 37½ years younger than the person transferring the assets, and their parents must still be alive.
The GSTT only applies when the money transferred exceeds the lifetime gift exclusion, which means most people will never have to pay it. Some states have an estate tax, which could result in more taxes. The state estate tax exemption is much lower than the federal level.
Helping your heirs receive as much as possible requires good estate planning. Avoid mistakes by contacting an estate planning attorney for a strategy that works with the latest tax laws.
The Epoch Times copyright © 2023. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
