Having a comprehensive estate plan in place is crucial to protecting your assets and ensuring they are distributed according to your wishes after you are gone. One key estate planning consideration for individuals with substantial assets is minimizing or avoiding federal gift and estate taxes. Although not everyone will be subject to these taxes, those with larger estates need to plan carefully to reduce potential tax liabilities. With that in mind, the Los Angeles attorneys at Schomer Estate & Wealth Advisors discuss estate planning strategies to help your estate avoid federal gift and estate taxes.
Understanding Federal Gift and Estate Taxes
Federal gift and estate taxes are imposed on the combined value of your qualifying lifetime gifts and the value of your estate assets at the time of your death. All taxpayers, however, are entitled to make use of the lifetime exemption to reduce taxes. In 2024, the lifetime exemption is $13.61 million, meaning the first $13.61 million of an individual’s estate is exempt from these taxes, and for married couples, the exemption can be doubled to $27.22 million if proper planning is in place. Any amount that exceeds the exemption is subject to a 40 percent tax. To help mitigate this tax burden, there are several tools and strategies available that can reduce your taxable estate and maximize the value of assets passed on to your beneficiaries, including:
- Annual Exclusion: One of the most straightforward ways to reduce the size of your taxable estate is through making use of the annual exemption. The Internal Revenue Service (IRS) allows individuals to gift up to $18,000 per year to an unlimited number of beneficiaries without incurring gift tax. This means you can gift $18,000 to as many individuals or entities as you like each year without it counting toward your lifetime gift tax exemption. Over time, annual gifting can significantly reduce the size of your estate while allowing you to support loved ones during your lifetime. For example, a married couple can gift up to $36,000 to each of their children or grandchildren every year, thus transferring substantial wealth outside of the taxable estate.
- Irrevocable Trusts: Irrevocable trusts are one of the most effective estate planning tools for minimizing estate taxes. Once assets are transferred to an irrevocable trust, they are no longer considered part of your estate, which means they are not subject to federal estate taxes. A Grantor Retained Annuity Trust (GRAT) is a popular irrevocable trust option that allows you to transfer appreciating assets to your heirs with minimal gift tax consequences. With a GRAT, the Grantor receives annuity payments for a fixed period of time. If the trust’s assets appreciate faster than the IRS-set interest rate, the excess value is passed to the beneficiaries tax-free. Another option is a Charitable Remainder Trust (CRT), which allows you to donate assets to a charity while still receiving an income stream from the trust during your lifetime. Upon your death, the remaining assets go to the charity, and your estate can claim a charitable deduction, reducing the overall tax burden.
- Portability for Married Couples: Portability is an important estate planning tool that allows married couples to maximize their combined federal estate tax exemption. When one spouse dies, the surviving spouse can use any unused portion of the deceased spouse’s exemption, effectively doubling the estate tax exemption for the surviving spouse; however, this strategy only delays paying taxes if the surviving spouse does not take steps to protect the remaining assets.
- Family Limited Partnerships (FLPs): A Family Limited Partnership (FLP) is another strategy for reducing estate taxes while maintaining control over your assets. By transferring assets into an FLP, you can gift ownership interests in the partnership to your heirs. Since the value of these interests is often discounted due to lack of marketability or control, the amount subject to gift or estate tax is lower than the actual value of the assets.
- Life Insurance Trusts: A life insurance trust, such as an Irrevocable Life Insurance Trust (ILIT), can help keep life insurance proceeds out of your taxable estate. When you create an ILIT, the trust becomes the owner of the life insurance policy, and the death benefit is paid to the trust upon your death. Because the proceeds are not part of your estate, they are not subject to estate taxes, and the trust can distribute the funds to your beneficiaries tax-free.
Minimizing or avoiding federal gift and estate taxes requires careful planning and the use of specialized estate planning tools. Consulting with an experienced estate planning attorney is crucial to ensuring that your plan takes full advantage of these tools and aligns with current tax laws.
Can We Help Your Estate Avoid Gift and Estate Taxes?
For more information, please join us for an upcoming FREE seminar. If you have additional questions about how to incorporate estate planning strategies into your plan to help your estate avoid gift and estate taxes, contact the experienced Los Angeles estate planning attorneys at Schomer Estate & Wealth Advisors by calling (310) 337-7696 to schedule an appointment.
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