Passing your estate to your beneficiaries without proper estate planning could mean they get much less than you hope if not done correctly. Estate taxes could eat up to 40 percent of it, but tools are available to pass your assets on and minimize taxes.
Gifting
Giving gifts to your beneficiaries is one of the simplest ways to minimize estate taxes. Your gifts in 2023 need to be limited to $17,000 per year per person. Couples can give up to $34,000 to an individual. You can give gifts to as many people as you want, and as long as they are under this limit, there is no gift tax.Gifts can also be given to cover medical expenses or education costs. The money must be contributed directly to the institution to reduce your income.
The Internal Revenue Service says that gift-giving to individuals will not reduce your taxes as a donor. Still, your beneficiaries will be grateful for the gift.
Reducing your estate through gift-giving while you are still alive enables you to minimize the estate taxes once you die. Save enough assets to meet your needs while still alive, plus medical expenses and burial costs.
Charitable Gifting
Giving gifts to charity reduces your taxable estate and gives you a tax deduction—and can help you avoid capital gains tax. Charitable gifting can be done in many ways while still alive and after you are gone. The gifts, which may include physical assets, must be given to qualified organizations. Some items need an appraisal, and you must obtain a receipt. You can also give required minimum distributions (RMDs), stocks, bonds, etc., if you do not need them. Fidelity mentions that you can create donor-advised funds (DAFs) and get a tax deduction for annual contributions.Gifts to Minors
Gifts can be given to minors in several ways. It may include cash or property such as securities, real estate, artwork, and more. Gifts valued up to the limit of $17,000 (for 2023) do not incur any tax to the minor, Findlaw says. Anything of higher value is taxed at the minor’s tax rate. Earnings are also taxed.You can also contribute to a 529 account for a child’s education. Fidelity says this account allows you to give up to five years’ worth ($85,000 per person in 2023) in one year—which could give you a considerable tax deduction in any year you need to reduce your income taxes.
Marital Transfers
One spouse can transfer money and assets to the other one without any taxes. It is called the unlimited marital deduction. Investopedia says that any amount of assets—even all of them—can be transferred while alive or after death, and no estate tax will be due. Taxes will be due when the asset is sold.When the second spouse dies, all estate taxes will be due. Marital transfers only permit the delaying of estate taxes. If the value of assets is greater than the lifetime exclusion amount, which is $12.92 million for 2023, taxes for the excess will be due.
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The exception to this rule is when a spouse is not a U.S. citizen. TheBalance reports that the gift limit to non-citizen spouses is $175,000 in 2023. Taxes on gifts larger than this will be due.
Trusts
If you are afraid that giving large amounts of wealth into your child’s hands all at once could cause them to become indifferent to their own success, you can put your assets into a trust. A trust enables you to dole out limited amounts at your set timetable—even after you are gone.Irrevocable Life Insurance Trust
A life insurance trust is a trust that controls the benefits from a life insurance policy after the donor’s death. The trust must be irrevocable, meaning that it is no longer under the possession or control of the grantor. Because it is an irrevocable trust, the Cornell Law School says that the funds are not part of the estate, enabling it to avoid all estate taxes. Being a trust, the grantor determines the terms of the distribution of the funds. An asset manager must be chosen to control the account.The type of life insurance policy could make a difference in the value of the trust. A term life insurance policy could expire before the grantor’s death, rendering the trust without assets. It must be renewed at the end of each term, although terms can be as long as 30 years with some companies. A whole-life policy does not expire, but it costs much more and you get less coverage.
Private Annuity
Valuable assets can be sold to a family member in exchange for a commitment to make regular payments to the seller while still alive. Since the original owner no longer owns the asset, the estate is reduced by its value. Payments to the seller will become part of the estate.Family Limited Partnership
When a family has a business, it can reduce income taxes and liability by creating a limited partnership or a limited liability company. Usually, the parents or grandparents become the general partners, and others are the limited partners. Once created, shares are distributed to the limited partners, and only family members can buy them.FindLaw says this arrangement has limited marketability, which enables interest to be tax deductible by 15–30 percent. Creditors cannot come after partners for debts, but each partner is responsible for paying taxes on their share of the interest.
There are many ways to minimize estate taxes. Creating trusts is one of the best tools. They are very flexible and can do almost anything you want to pass your assets to your beneficiaries. Making a trust successful requires working with an estate planning lawyer to set it up properly.
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.
