When you’ve spent years, even decades, growing your estate, you want to do everything you can to ensure that as much money as possible makes it to your beneficiaries. Gift and estate taxes can take a bite out of your account to the tune of 40 percent. This is no small sum, so forming a plan to minimize your estate taxes can have a huge impact. Here are several smart tax strategies that can help.
If you can afford to do so, you should consider transferring wealth earlier in your lifetime to gain immediate tax advantages for yourself due to simply having a smaller estate. You will have to navigate the world of gift taxes carefully, but the effort will allow you to minimize future estate taxes. It is also important to make sure you leave enough for yourself during your retirement.
“When it comes to minimizing transfer taxes, lifetime gifts are generally better than testamentary gifts because they reduce the size of your taxable estate,” says Charles Schwab’s Rande Spiegelman, CPA, CFP, vice president of financial planning, Schwab Center for Financial Research.
For each tax year, you can give up to a certain amount without the gift tax’s coming into play. Currently, the maximum is $14,000 per person, given to any number of people in a single year. That amount increases to $28,000 if spouses are splitting the gift.
“Additionally, you can give away a total equal to the lifetime gift tax exemption amount before any gift tax is due,” states Spiegelman. “Keep in mind that the unified tax credit of $5.34 million includes both the lifetime gift tax exemption and the estate tax exemption, and an increase in one will reduce the other.”
If you would like to give a gift but still preserve your lifetime exemption, there is a great strategy you should know about. You can avoid approaching your lifetime exemption by making payments directly to qualified educational or medical providers on behalf of the person you want to give a gift to. That person will not owe income tax on the sum.
Another way to supercharge gifting is to conduct it through a Family Limited Liability company, which provides you with asset protection and estate tax reduction. If you are married, you can take fuller advantage of your lifetime gift tax exemption and annual exclusion gifts by creating a Spousal Lifetime Access Trust (SLAT). Your financial advisor can help you with these advanced gifting strategies.
It is important to note that a gift counts as such only if it is irrevocable, so take the time to carefully plan your gifts with your financial advisor or tax professional. Furthermore, it is important not to get carried away with gifting and to consider your own needs and the needs of your spouse. Your financial advisor can help you determine how much you need to live on—and be sure to overestimate for extra padding—which will let you know how much you can afford to give.
In addition to spending or gifting down the size of your taxable estate, there are many other ways you can reduce your estate taxes.
“Creating a charitable trust, such as a Charitable Remainder Trust, gives you a charitable income tax deduction when the trust is funded and gives your estate a charitable estate tax deduction after you die,” says Julie Garber, a wills and estate planning expert with About.com. “A Qualified Personal Residence Trust allows you to live in your home for a period of years and then the home will pass to your heirs at a reduced value for estate and gift tax purposes after the period ends.”
Hopefully these strategies have given you some new ideas and gotten you excited about the possibility of saving more on taxes. If they have, be sure to make an appointment to have a discussion with your financial advisor soon to form a concrete plan that puts them into action. The earlier you start with your new tax strategies, the more you can save.
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