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Estate planning tools that could reduce your estate taxes

On Behalf of | Nov 8, 2023 | Estate Planning |

If you have significant assets, you might be worried about how estate taxes will eat into your legacy and your loved ones’ inheritances. Fortunately, the federal estate tax doesn’t kick in until your assets hit the $12.92 million mark. At that point, only assets beyond that $12.92 million limit will be taxed. That might seem like a lot of money, but if you own real estate and have investments, you might hit that level of wealth quicker than you think.

That’s a big deal, especially given the rates at which you can be taxed. Under the federal tax code’s sliding scale, you’ll end up paying anywhere between 18% and 40% in taxes if you have more than $12.92 million. If you want to avoid a significant portion of your estate being eaten away by these taxes, you need to know how to create an effective estate plan that allows you to reduce or even avoid estate taxes.

How to use your estate plan to save on estate taxes

Although taxation might have you stressed out about the future of your estate, you have several estate planning options at your disposal. Let’s look at some of them here:

  • Giving gifts during your lifetime: One way to ensure that you effectively pass down your wealth while reducing the value of your estate for taxation purposes is to give money to your loved one’s while you’re still alive. That limit is $17,000 per person per year, which can quickly add up over time. This also has the benefit of allowing you to see your loved one enjoy what you’ve given them.
  • Marital trusts: There are a couple of types of marital trusts that allow you to leave your estate to your spouse without facing taxation issues. Depending on which type of trust you use, you specify what your spouse can access and how they can use the trust’s funds.
  • Charitable trust: If you have organizations and movements that you believe in, giving part of your estate to them can be a solid option. Here, you can transfer wealth to a charity or set up a trust for a charity, which will reduce the taxable portion of your estate and give you an income tax deduction. You can also take comfort in knowing that you’re supporting a good cause.
  • Private annuity: Here, you sell an asset in exchange for regular payments from the buyer. This transaction removes the asset, which might have significant value, from the estate, thereby reducing taxes. The payments made to you after selling the asset do become part of the estate, but it’ll take a significant amount of time for those payments to equal the value of the asset in question.
  • Life insurance trust: With this estate planning vehicle, you transfer money into the trust, which is then used to pay premiums on a life insurance policy. When you pass away, the proceeds from the policy are paid to the trust rather than the estate, which removes that wealth from the estate tax calculation process. Just keep in mind that this trust has to be irrevocable in order to reach its desired outcome as it pertains to taxation.

Develop the effective estate plan you need to save on taxes

These are just some of the estate planning options that you can use to try to reduce your estate taxes. There are others that might be right for you and your family. Critical to the estate planning process is knowing your options and how to piece together an estate plan that’s most effective for you. Fortunately, you don’t have to try to navigate this process on your own and instead can surround yourself with the support and resources you need to be successful.



Photo of Jennifer D. Sharpe