Adults with any assets, children, or pets should consider estate planning. However, those with large estates require the expertise of estate planning attorneys who consider tax implications and how to maximize your assets for your long-term financial health – as well as your heirs and beneficiaries.
Five Strategies To Help Reduce Estate Tax Implications
In the beginning, your estate plans may have been rather simple. They ensured you had all of the estate planning essentials in place – like an advanced medical directive, guardianship plans for children or loved ones with special needs, and a basic will or trust.
Over time, and with the acquisition of more properties and other assets, it’s wise to ensure your estate planning attorney is maximizing your assets by creating strategies that address various scenarios and tax implications.
Gift assets to beneficiaries while you’re still alive
The theme of American Inheritance Narratives is often that individuals or couples amass assets and wealth, which are then distributed to loved ones when they die. However, this narrative often means unnecessary taxation.
For example, the annual gift tax exclusion is $18,000 per person in 2024, up from $17,000 in 2023. So, if you begin gifting loved ones annually, they can enjoy your generosity while you’re still alive, which is a wonderful thing. And those limits reset each year.
Other ways you can share tax-free assets with loved ones while you’re still alive include things like:
- Selling vehicles and other assets you’ve purchased for lower than the market rate to future beneficiaries (and you can pay all associated fees for them if you wish).
- Treating them to exceptional college funds.
- Set up tax-advantaged 529 college tuition plans for those you want to see receive further education or vocational training.
- Write checks directly to the university or vocational training programs (there’s no limit on those as they’re payments rather than gifts).
- Pay off significant medical payments for people you value.
- Create a family limited liability company (FLLC) through which you can maintain control of your interests and decisions while gifting interests equitably to your children.
- Spend money on gift cards and gift certificates that loved ones can use for everything from fuel and groceries to self-care treatments, movies, and general spending.
Your estate planning attorney can help you create long-term financial plans that optimize gifting now, which reduces estate taxation now and in the future.
Make significant charitable contributions
The more you give to the charities and non-profits (501 3C) you believe in, the less you’re taxed. Depending on the size of your estate, your estate planning lawyer can talk to you about:
- Making annual gifts.
- Establishing endowments.
- Creating scholarship funds.
- And other opportunities.
Finally, we can set up charitable trust funds that protect your assets from excess taxation after you die and that continue gifting funds to the organizations you’ve supported during your lifetime.
Establish a qualified personal residence trust (QPRT)
Your primary or vacation home can be placed in a qualified personal residence trust (QPRT), which is a specific type of living trust. In most cases, you’d use the home with the highest property value (or projected property value increase) to take optimal advantage of the process.
When you create a QPRT, you can:
- Continue living in and using the home.
- Select the beneficiaries who will inherit the home when you die.
- Lock in the home’s value, preventing beneficiaries from paying any gift taxes when you die.
- Reduce the total assets subject to taxation when you die.
Learn more about the benefits of irrevocable trusts
Again, finding an experienced estate attorney is critical when considering the tax implications of estate planning to maximize your assets. One strategy that can be effective is the creation of an irrevocable trust.
However, irrevocable trusts live up to their name. They become their own “entity,” so to speak, and you cannot change their parameters once you create them. So, this is a very serious strategy – and can absolutely reduce estate taxes while maximizing assets. However, you should only create irrevocable trust with the guidance of a trustworthy estate planning attorney who has explained all of the implications, risks, and benefits.
Establishing a generation-skipping trust
The U.S. tax code includes a generation-skipping transfer tax. This means that in certain situations, assets that transfer to your grandchildren rather than your children may be subject to higher taxes.
In their post about this specific tax, Investopedia explains:
Before the generation-skipping transfer tax was introduced in 1976, wealthy individuals were legally able to gift money and bequeath property to their grandchildren, without paying federal estate taxes. The legislation effectively closed the loophole where inheritances could skip a generation to avoid double estate taxation.
Today, the generation-skipping transfer tax is a federal tax on a gift or inheritance that prevents the donor from avoiding estate taxes by skipping children in favor of grandchildren. With the generation-skipping transfer tax, grandchildren receive the same amount as if the inheritance were coming from their parents.
The way around that is to establish a generation-skipping trust. This way, you have the ability to pass that money to your grandchildren ( those at least 37.5 years younger than you) without any estate taxes being paid. In 2024, beneficiaries or a trust would only pay taxes if the estate is worth $13.6 million or more. And, if legislators don’t amend the law, that total taxable estate maximum will drop to $5 million in 2025.
Create Wise Estate Tax Strategies With Tseng Law Firm
Don’t allow your estate to pay money in unnecessary taxes and fees. Schedule an estate planning appointment with Tseng Law Firm. We work with clients just like you, maximizing their assets while minimizing their tax obligations to create the brightest futures possible for their heirs and beneficiaries.