As you grow your financial portfolio and net worth, estate tax planning is the best thing you can do to protect your assets and minimize your estate tax liability. A solid financial plan not only takes care of your family upon your death and meets your financial goals; it will also keep inheritance taxes (and therefore nasty surprises) to a minimum. With the federal estate tax rate at 40%, estate tax planning can make a huge difference when it comes to tax savings.

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Estate Tax Planning

When it comes to estate tax planning, any asset you own or control is part of your taxable estate. No matter the size of your net worth, it is incredibly important to undertake estate tax planning, because the goal of estate tax planning is to reduce the amount of taxes your beneficiaries will need to pay upon your death.

Your assets typically include IRAs and retirement plans, life insurance, annuities, real estate and other property, any assets held in a revocable trust, and any assets held as joint tenants with rights of survivorship. In other words, it’s a lot to take into consideration.

If your estate’s value is less than $12.92 million (in 2023), your beneficiaries will receive a credit towards the federal tax owed – that’s called an applicable exclusion. If the taxable estate is more than that, filling an estate tax return is required and the applicable exclusion reduces the amount of estate tax due. As you may have guessed, the applicable exclusion can either eliminate or reduce your estate tax bill, which is one thing we will look at.

No matter what your situation, the team at TPI will work with you to create an estate plan that covers all of your taxable assets and includes a will, power of attorney, and medical power of attorney.

If it makes sense for your situation, we will move your estate into a trust. Trusts allow you to reduce your estate and gift taxes and distribute assets to your heirs without the expense, delay and publicity of probate court. Trusts can also offer greater protection of your assets from creditors and lawsuits. 

Estate Tax Planning Strategies

One popular and effective estate tax strategy, TPI uses is to transfer wealth during your lifetime. In developing the best plan for you, we will consider your current situation and financial goals. Based on your needs, our estate tax strategies will focus on minimizing the often hefty transfer taxes.

Some of the estate tax strategies we use include:

Credit shelter trust planning: This involves creating a credit shelter trust from the estate of a deceased spouse. The surviving spouse can receive income and may access the principal, while the assets are sheltered for estate tax purposes.

Lifetime gifts: Lifetime gifts reduce the size of your taxable estate. Leveraging the annual exclusion, you can gift up to $17,000 to an unlimited number of people each year without triggering gift tax ($34,000 for spouses splitting gifts).

Qualified medical and educational providers: You can make unlimited payments directly to medical and educational providers on behalf of your loved ones, who will pay no gift or estate taxes on it.

Marital trust: With a marital trust, the surviving spouse can take advantage of the deceased spouse’s estate tax exemption without having a bypass trust in place.

Family limited partnership (FLP): You can gift the majority of the business partnership to family members in the form of limited partnership interests. Because limited partners have no say in running the partnership and usually can’t sell or borrow against their interests, valuation discounts arising from lack of liquidity and marketability will apply for gift tax purposes.

Life Insurance Role in Estate Tax Planning

Life insurance plays a vital role in estate tax planning, offering a way to reposition assets to provide additional financial security for your family while also minimizing inheritance tax and income tax.

Many people do not realize that the IRS does not tax life insurance proceeds as taxable income for the recipient. For substantial estates, life insurance can provide liquidity to pay any estate or gift taxes. This is very helpful if the estate’s assets are tied up in a family business or real estate.

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