We’d like to wrap up our three-part series on estate planning by discussing high-level estate tax planning concepts and strategies. Be sure to review our previous articles on Wills and Trusts and Asset Protection which highlighted the basics of estate documents and ways to protect your assets, respectively.
Three transfer taxes to be aware of during estate planning:
- Estate Tax – in 2022 the federal exemption amount is $12.06M for individuals (and double for married filing jointly). This limit is set to reduce in 2026 upon the sunset of the Tax Cuts and Jobs Act, unless further changes are made in congress. If you surpass this amount by more than $1M you could be faced with a 40% tax on those assets.
- Gift Taxes - might be imposed if you exceed the lifetime exemption amount. In 2022, you can gift up to $16,000 ($32,000 if married and filing jointly) to an individual without incurring a gift tax. This gift can be made every year to any number of people as long as you don’t exceed the limit to each person.
- Generation-Skipping Tax - might occur when the deceased gifts to grandchildren or someone more than 37 ½ years younger than them. These taxes are also subject to exclusion limits.
Strategies to avoid estate tax burden:
- Giving while living – as mentioned above, you can annually give away up to $16,000 ($32,000 if married filing jointly) in 2022 to a single person. There is no limit to the number of people you can gift to each year.
- Charitable Giving – giving to charities throughout your lifetime or making charitable bequests upon death will reduce your estate, but utilizing charitable trusts such as a Charitable Lead Trust or Charitable Remainder Trust provide more strategic options than simply giving it away.
- Marital Trust – an irrevocable trust allowing the transfer of a deceased spouse’s assets to the surviving spouse with no tax impacts. The trust will not be included in the surviving spouse’s estate upon their death (reducing potential estate taxes).
- Family Limited Partnerships – a holding company with family assets owned and controlled by general partners (typically the parents) that gift limited partnership interests (no control operating of the FLP) to children or heirs at a discount over time. This allows for maximizing the estate tax exemption.
- Establish Irrevocable Life Insurance Trust (ILIT) – assigning the life insurance policy to the trust removes the proceeds from your estate and can help pay estate tax burdens.
- Grantor Retained Annuity Trust (GRAT) – trust created to move wealth out of the estate while still receiving income (annual distribution) from the assets. The remaining assets would be passed to heirs upon death.
We’re always happy to review your holistic financial plan, including estate planning. Please give us a call anytime to discuss your planning goals.
Matt and Andrew