What Can I Do to Ensure My Beneficiaries Don’t Have to Pay Significant Estate Taxes?
A major concern for many people, especially high net-worth families, is how stringently their beneficiaries will be assessed estate taxes when it’s their time to inherit the estate. They hate to see what should be financial security become a financial burden.
Fortunately, multiple strategies can be used as part of what’s called advanced estate planning that can help mitigate any financial burdens involved in receiving a designated inheritance. Here’s what you need to know.
What Are Some Advanced Estate Planning Strategies That Could Reduce Estate Taxes?
There are many. Every estate is unique, so no one plan works for every estate. That’s why it’s crucial to work with an experienced advanced estate planning attorney who can assess your estate and its nuances to determine the best approach to protecting it from unnecessary taxes in the future.
These are not all the possibilities, but this list can give you an overview of the estate planning tools that might help you.
Trusts
Trusts can be invaluable estate planning tools for numerous reasons, including the potential to reduce estate taxes. In general, a trust is a legal mechanism in which someone’s assets are moved from their personal ownership into the trust’s ownership. There are several reasons that make trusts popular, one being the fact that assets owned by a trust don’t have to go through probate court when the original owner passes away. Probate court is a public proceeding, but trusts protect and keep those assets private.
It’s vital to understand that there are many different types of trust, some of which offer more potential tax benefits. In contrast, others offer little to no tax benefits–but have other positive aspects that should be considered.
- Revocable trusts. As the term implies, these are trusts that can be modified or canceled after being set up. That flexibility provides considerable peace of mind, which is valuable in itself, but something it doesn’t usually offer is tax benefits. However, they’re helpful in allowing the assets not to have to go through probate and can assist in distributing assets efficiently when the time comes.
- Irrevocable trusts. Once the trust is finalized, assets placed in this type of trust are permanently there. As the term indicates, they’re not changeable or cancelable in the vast majority of cases. There are a few exceptions, but they’re complex and time-consuming to pursue. However, irrevocable trusts can be excellent strategies for reducing estate taxes when estate planning.
- Charitable trusts. These are designed to distribute assets to charitable organizations, which also provides tax advantages to the estate’s owner. It becomes a win-win in that the charity benefits from receiving assets while the estate benefits from reduced taxes. How much control the estate owner has over the trust depends on the variables involved in setting it up.
Strategic Gifts
Another popular strategy is providing beneficiaries with gifts while the estate owner is still living. There are two primary reasons this is successful and popular.
One is that it can, over time, reduce the overall value of the estate, ensuring there will be less to tax when the estate’s owner passes. The second is that there are gift limits that allow someone to make financial gifts, and if those gifts are under the established limit, the recipient doesn’t have to pay a gift tax.
Another variation on this is making gifts beyond the gift tax threshold. That might trigger gift taxes for the recipient, but it contributes to the reduction of the estate.
What Criteria Is Involved in Determining the Best Way to Approach Advanced Estate Planning?
California doesn’t levy estate taxes, so that’s one positive. However, there are other factors that influence how an estate may become taxable to the recipient. Some of these factors include:
- Value of the estate. The assessed value of the estate at the point where the estate’s owner passes has much to do with potential taxes. It’s not uncommon for estate owners to underestimate the value of their estate and not plan accordingly. That’s one reason it’s vital to not only set up estate plans but to review them and modify them as needed going forward. Laws change, and that can affect estate plans too.
- Which assets are taxable. It’s possible that some of the estate’s assets aren’t subject to estate taxes to begin with. An experienced estate planning attorney can help you identify those and plan accordingly.
- Minimum valuation for estate taxes. While California doesn’t have estate taxes per se, federal laws provide exemption limits for estates, meaning that if an estate is below the exemption limit, it won’t be subject to federal estate taxes. In 2024 (the amount can change annually), the exemption is applicable to someone whose estate is worth $13.61 million or less. That’s per person, so a married couple or domestic partner could have an estate worth $27.22 million.
What Should I Do if I Worry About the Potential Taxes on My Estate?
Call Celaya Law as soon as possible at 707-754-0977 to request a free consultation. We can examine your estate’s details and work with you to determine what might be the best approach to set up your estate plan with the goal of minimizing taxes as much as possible. Our team of experienced, knowledgeable estate planning attorneys understands how important it is for you to protect your estate and its beneficiaries and will help you achieve that.