If you have accumulated significant assets, taxes can take a major bite out of the inheritance your beneficiaries receive if proper planning is not done. Estate taxes at the federal and state levels, capital gains taxes, income taxes, and other taxes can drain an estate.
Fortunately, an experienced estate planning lawyer can play a crucial role in developing strategies to ethically minimize tax liability and maximize the net value transferred to your heirs.
Below, we will explore some of the key ways a knowledgeable estate planning attorney at Hammond Law Group can help reduce taxes on an estate through proactive planning.
Utilizing Exemptions and Deductions
Perhaps the most basic estate tax planning strategy is taking full advantage of all available exemptions and deductions. For federal estate tax, the current individual exemption is over $12 million. Married couples can use both exemptions to shield up to $24 million. Your attorney will incorporate exemption use into your plan.
The lawyer will also factor in other deductions like charitable donations and the costs of administering your estate. Maximizing deductions legally can further reduce estate tax liability.
Portability of Unused Exemption
A new spouse can now utilize any unused federal estate tax exemption from a deceased spouse. This “portability” provision can double the available exemption for the surviving spouse to over $24 million. Your lawyer will make sure proper estate tax returns are filed to take advantage of portability.
More advanced tax minimization plans involve setting up irrevocable trusts to remove assets from your estate. Trusts like credit shelter trusts, qualified personal residence trusts, and irrevocable life insurance trusts can be structured to avoid estate taxes on trust assets. Your lawyer will know which trusts make sense for your situation.
Annual Gift Tax Exclusion
A little-known tax provision allows you to gift up to $16,000 in 2023 to as many individuals as you want each year without incurring gift tax or using up any exemption. Your attorney can advise you on gifting to systematically transfer assets out of your taxable estate over time.
Paying Medical and Tuition Costs
Paying medical bills and tuition directly for another person does not count against your $16,000 annual exclusion. Your estate planning lawyer may recommend paying these costs for heirs to reduce estate size.
Life Insurance Planning
Life insurance death benefits are included in your taxable estate. But your attorney can help you set up an irrevocable life insurance trust to own policies and keep proceeds out of your estate.
Retirement Account Distributions
Your lawyer will consider retirement account required minimum distributions and coordinate account distributions to minimize income and estate taxes.
Charitable remainder trusts allow you to leave money to your family while also making a charitable impact. Your estate planning attorney will evaluate using this tool to realize income, gift, and estate tax savings.
Business Succession Planning
Your lawyer can help structure the ownership transition of a family business through gifts, trusts, limited partnerships, etc., to reduce valuation and minimize estate and capital gains taxes.
Living Trusts and Wills
Distributing assets through trusts and wills designed to optimize the use of exclusions and exemptions is key. Your attorney ensures these documents are structured tax-efficiently.
Asset Protection Planning
Protecting your assets from creditors and lawsuits through trusts and other tools decreases the size of your taxable estate. Your lawyer will advise you on strategies to legally shield assets.
Life Insurance to Cover Taxes
One strategy an estate planning attorney may recommend is taking out a life insurance policy to cover potential estate taxes, with the beneficiaries named specifically to receive proceeds to pay tax liabilities.
Here are some key things to know about this approach:
- Estate taxes can claim up to 40% of assets over exemption limits, which can be hundreds of thousands of dollars for wealthy estates. Life insurance benefits received by beneficiaries are income tax-free.
- The attorney can project potential estate tax liability and recommend an appropriate face value for the life insurance policy to cover it. This ensures funds will be available to pay estate taxes.
- The life insurance policy owner would need to be an irrevocable life insurance trust, not the insured person, to keep benefits out of the taxable estate. The trust buys and owns the policy.
This method essentially transfers the estate tax burden from heirs to a life insurance policy. The lawyer’s guidance is key to implementing it effectively.
State Tax Planning
Your lawyer will evaluate state estate taxes and incorporate state exclusions and deductions into your estate plan to minimize taxes owed to your state.
Reducing estate taxes to maximize your legacy takes thorough planning. The estate planning attorneys at Hammond Law Group in Colorado Springs have the sophisticated understanding of tax law needed to develop a plan to lower your taxable estate through many strategies. Don’t leave money on the table for the government. Consult an attorney to legally minimize taxes.