Estate planning serves numerous goals, including determining how to distribute one’s assets after death, protecting wealth from creditors, preparing for potential incapacity, and providing for vulnerable loved ones. However, many people may also consider tax efficiencies during estate planning. An estate plan may focus on minimizing tax liabilities that could cut into an individual’s or family’s wealth.
Understanding Estate Taxes
When a person passes away, the federal government will tax the value of the decedent’s estate. Some states also impose estate taxes; Mississippi does not. Federal tax law provides a sizable exemption for estate taxes, meaning many individuals will not trigger estate taxes when they pass away. However, for people with sizable estates or who have utilized their estate tax exemption through lifetime gifts, estate planning can provide a way to reduce tax burdens and keep more of their wealth for their families.
Key Strategies for Tax-Efficient Planning
Here are some common estate planning strategies used to achieve tax advantages.
Gifting strategies
Individuals can reduce their estate taxes by leveraging annual gift exclusions and lifetime estate tax exemptions. Under federal tax law, an individual can make tax-free gifts to a person up to a specific aggregate value (this amount increases regularly due to inflation). This annual gift tax exclusion applies to each person to whom an individual makes a gift. For example, a person who wishes to make gifts to each of their ten grandchildren can use a separate gift tax exemption for each grandchild. Federal tax law also provides a lifetime gift tax exemption, which covers gifts that exceed the annual gift tax exemption; the lifetime exemption also applies to assets distributed as part of one’s estate after death.
Thus, lifetime gifting strategies can help individuals reduce the value of their estates to avoid triggering federal estate taxes.
Trusts
Irrevocable trusts can help families reduce the size of their estates to minimize estate taxes. Assets a person places in an irrevocable trust leave their estate and no longer count for estate tax purposes. Individuals may also use other types of trusts to manage other assets, such as irrevocable life insurance trusts to keep life insurance proceeds out of one’s estate. Finally, families can use charitable trusts to leverage the tax benefits of charitable giving to manage tax liabilities.
Family limited partnerships/LLCs
Families may invest their wealth in family limited partnerships or LLCs to hold valuable assets like real estate or business interests and manage them on their behalf. FLPs and LLCs can help families avoid taxes that may result from transferring family wealth from generation to generation by keeping assets in a permanent legal entity, with ownership/control of the entity passing between generations.
The Benefit of Reviewing and Updating Your Estate Plan
You shouldn’t undertake estate planning only once in your life. Your financial and personal circumstances will change during your lifetime, which may also require your estate plan to change. Furthermore, changes in federal and state tax or estate laws may render parts of your estate plan out of date or provide you with more advantageous estate planning options. You should review your estate plan after events such as:
- The birth of children or grandchildren
- Marriage or divorce
- Acquiring substantial assets
- Substantial changes in finances
- Moving to a new state
- Changes in estate or tax laws
Working with an experienced estate planning lawyer can help you update your estate plan to leverage all available tax benefits.
Contact an Estate Planning Attorney Today
When your estate planning goals include minimizing tax liabilities to preserve your family’s wealth, an experienced estate planning lawyer can help you develop tailored strategies to achieve your objectives. Contact Palmer & Slay, PLLC today for an initial consultation with an estate planning lawyer to discuss your legal options.