People do not need to be millionaires to benefit from estate planning for estate and gift taxes.
Many people have more assets than they think they do.
Although their checking and savings accounts are below triple digits, they own a home, a retirement account or two, bonds, stocks, valuable personal property and collectibles, a motor (or electric) vehicle or two, or a business.
When all assets are valued and added together, these folks may find themselves beyond their state or the federal estate tax exemption threshold.
Yikes!
Why?
The IRS requires an accounting of your ownership or interest in assets at the time of your death.
The total value can subject your estate to taxes.
Without considering all of your assets when estate planning, you could leave a hefty chunk of your wealth to the government.
An accurate understanding and valuation of assets are necessary to reduce estate and gift taxes with estate planning.
Estate and gift taxes both have estate planning implications.
Estate taxes are taken based on the total value of your estate when you die.
Gift taxes are paid based on property and money transfers during your lifetime.
If you choose to give a highly valued asset or significant sum to a family member or friend, then this gift could be subject to the federal gift tax unless you utilize the annual exclusion.
What is the annual exclusion?
The annual gift tax exclusion allows you to gift a certain amount without triggering this tax.
To avoid these tax liabilities, you should understand these constraints and plan around them.
The size of your estate will impact how substantial a hit the tax bill will take to your assets.
If the government takes a large portion, it will leave your heirs with less of the wealth you built.
Working with an experienced estate planning attorney allows you to incorporate strategies to minimize the impact of estate taxes.
Your attorney may recommend strategies such as utilizing the tax-free marital deduction to transfer wealth to your spouse, making lifetime gifts to loved ones, or setting up a trust.
Distributing assets while minimizing taxes requires proactive planning.
What actions can you take?
1. Understand the Current Tax Laws
The federal and state governments have their own tax laws.
It is essential to know how to handle estate and gift taxes.
Because the IRS updates its rules regularly, you should work with an experienced estate planning attorney to create a plan to meet these specific requirements and to update your plan as necessary
2. Make Lifetime Gifts
The federal government has annual gift tax exclusions.
You can reduce your overall estate tax burden by gifting money in sums under this exclusion amount to heirs while you are alive.
Sometimes, we refer to these as "warm hands" wealth transfers.
3. Use Trusts Wisely
Trusts can be used for various estate planning purposes, such as providing instructions to heirs, reducing estate taxes, and managing assets.
With an irrevocable life insurance trust (ILIT), you can remove the proceeds of your life insurance policy from your taxable estate.
As a result, you could save your heirs big (and I mean really big) money in taxes on the benefit payout.
In addition to tax benefits, trusts can help ensure money is used wisely or for specific purposes, such as paying for an education, starting a business, or buying a first home.
4. Review Your Plan Regularly
The laws governing state and federal gift and estate taxes are not set in stone.
A plan you made for the current exclusion amounts may not provide sufficient tax protections in the next few years.
Additionally, life changes, such as moving to another state or having a child, can impact the effectiveness of your plan to meet your goals.
You should regularly review your plan for changes in tax laws, family dynamics, and financial situation and update it accordingly.
If you desire to maximize the inheritance left to your loved ones, you cannot afford to procrastinate.
Working with an experienced estate planning attorney allows you to create a comprehensive estate plan with the appropriate tools and strategies to meet your goals.
Whether you need a new estate plan or to update your existing one, Harvest Law KC can help. Contact us to schedule a consultation.
Comprehensive estate planning can help you minimize gift and estate taxes to maximize the inheritance left to loved ones.
Trusts and lifetime gifts are common strategies used to reduce tax liability.
Your estate plan must be reviewed and updated regularly to stay relevant and effective.
After all, if you want an abundant harvest, you must plan ahead.
This post is for informational purposes only and does not provide legal advice. You should contact an attorney for advice concerning any particular issue or problem. Nothing herein creates an attorney-client relationship between Harvest Law KC and the reader.
Reference: IRS (Aug. 22, 2024) "Estate and gift taxes | Internal Revenue Service"
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