People often only view estate planning as a way to divvy up their assets after they pass away. Transferring assets upon death is certainly a viable strategy, but without careful planning, it can also lead to a number of hurdles and/or inconveniences for your heirs, like probate or a hefty tax bill.
Avoiding these inconveniences drives people to seek out additional estate planning strategies. After all, you worked hard for your money, and you want to take all the necessary steps to ensure that your family isn’t saddled with avoidable taxes.
When it comes to estate planning, you may find that it’s more about what you leave behind while you’re still here, rather than what you leave after you’re gone. And it’s with this idea in mind that you may decide to explore alternative strategies for transferring wealth to your family and heirs.
Federal Estate Tax Exemption
When starting the estate planning process, you want to make sure your loved ones can keep as much of their inheritance as possible. Nobody wants to see their legacy get chipped away by a large tax bill, but that’s exactly what could happen to your estate without careful planning.
Under current law, the federal estate tax exemption is $12.06 million per person, meaning that at the time of your death, you can transfer assets worth up to that amount without incurring any sort of estate tax bill. If your estate is worth more than $12.06 million, then it could be taxed up to 40%. This is important, because though it’s your estate being taxed, it’s actually your heirs who would have to pay the bill. Luckily, with the exemption set at $12.06 million in 2022, not many people qualify for that sort of tax liability.
State Estate & Inheritance Taxes
However, that large exemption only protects your estate from being taxed by the federal government. Several states also have their own estate taxes with their own exemptions, and a handful of states even levy what’s called an inheritance tax, which is imposed on individuals who are the beneficiaries of assets from someone who has passed away. States with their own estate taxes have exemption amounts that are much lower than the federal estate tax exemption, so while you may be in the clear from having to pay estate taxes to the federal government, depending on where you live, you might still have to pay them to your state government.
Gifting While Living
Individuals who may be subject to estate taxes should consider spreading out gifts to family and beneficiaries while they are still living, thus reducing their taxable estate. This can be a great way to ensure Uncle Sam gets less and your family keeps more.
In 2022, the gift tax exemption has increased to $16,000, meaning an individual can gift assets worth up to $16,000 a year to as many people as they want without being taxed. For example, if you are married and have two children, both you and your spouse can each gift $16,000 to each child, which comes to a total annual gift of $64,000. If your children have spouses or children, then the amount that you and your spouse can gift increases from there.
Additionally, this strategy gives you the opportunity to see just what kind of impact you can have on your family. Many times, people pass something along after they’re gone with the intent that a family member will enjoy it later. But by gifting while you’re still living, you can see them enjoy it now.
Leveraging Life Insurance
There are also a couple strategies you could consider that involve a life insurance policy, including establishing what’s called an Irrevocable Life Insurance Trust (ILIT). This type of trust is specifically designed to hold a life insurance policy. Basically, you fund a life insurance policy and place that policy within an ILIT, which essentially removes the policy from your gross estate. This can help significantly reduce your estate, which has the potential to reduce or even eliminate your estate tax burden. Then, at the time of your passing, the policy is distributed to your family or beneficiaries.
Another option is to leave retirement assets to charities and replace those assets with life insurance that will go to beneficiaries. This can reduce their future income taxes.
Next Steps
These strategies only scratch the surface of what you can do to more efficiently transfer wealth to your family and heirs. When it comes to your legacy, you want to make sure you’re doing what’s best for your family and ensure you’re leaving the most behind, so it makes sense that you’d explore all your options.
The specialists at Wealth Enhancement Group have decades of estate planning experience and can help walk you through all your potential options. Reach out today to find out how we can help you build the right plan for your unique situation.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
