Estate taxes, often viewed as a complex financial hurdle, can significantly impact the legacy you leave for your loved ones. If you've ever wondered, "How can I minimize or avoid estate taxes?" you've come to the right place. Welcome to our article, where we'll delve into strategies and insights aimed at reducing the burden of estate taxes. With careful planning and informed decisions, you can preserve more of your hard-earned assets and ensure that your heirs receive the legacy you intend.
The tax cuts of 2017 temporarily doubled the amount individuals could give away without paying taxes. However, those cuts are due to expire in 2026, pushing well-to-do Americans to move fast, says a recent article from The Wall Street Journal, “The Moves Wealthy Families are Making to Skirt Estate Taxes.” According to recently published stats from the Internal Revenue Service, wealth transfer began to escalate in 2021, with more than $182.6 billion given away. Nearly $100 billion went into trusts, some of which can last for generations. A total of roughly $14.8 went to charity.
For Americans with a net worth over $10 million, it’s urgent to consider a range of moves before these tax cuts expire. There are a number of options, from simple gifts to heirs to setting up complex dynasty trusts to protect wealth over generations. The macabre alternative is to die before these cuts expire. The $10 million figure in the Tax Cuts and Jobs Act of 2017 was indexed for inflation. For 2023, the combined gift and estate tax exemption is $12.9 million per individual, or $25.84 million per married couple. This is the amount you may give away during your life or at death tax-free.
Next year, the amount will be adjusted to $13.61 million. For 2025, it may be as high as $14 million per person. But in 2026, it will drop by half to about $7 million. The tax cuts expire after December 31, 2025. Anyone facing an estate tax bill who hasn’t made any preparations will likely have a somber New Year's Eve.
Gifting Can Help
According to UBS and Credit Suisse's global wealth report, about 1.5 million Americans have a $10 million to $50 million net worth, and nearly 125,000 worth even more.
Direct gifts of cash or securities are the simplest way to make gifts to reduce your estate. The limit on annual tax-free gifts is $17,000 for 2023. It is expected to increase to $18,000 in 2024. Anyone can make tax-free gifts of up to $17,000 to an unlimited number of people. These gifts don’t count against the larger $12.92 million combined gift and estate tax exemption. Gifts made over $17,000 require reporting to the IRS using Form 709. Making gifts to a dynasty trust can preserve more wealth for children.
Can I Give to A Trust?
Trusts also offer asset protection. If assets are given to children directly, and they are sued or divorced, they could lose some or all of their assets. If gifts are made to a trust, it’s harder for a creditor to go after assets in the trust. Making gifts to a dynasty trust can preserve more wealth for children. The trust removes the assets from both your estate and your children’s estates, benefiting children, grandchildren, and future generations.
Real World Example
A couple who transfers their full exemption amount of $28 million by 2025, before the law sunsets, will benefit from $5.6 million in tax savings, if they die in 2026. If they make a gift to grandchildren, skipping a generation, there would be nearly $9 million in tax savings.
These tax savings might become significantly larger over time. The appreciation is exempt from the transfer tax system when money grows in trusts. Therefore, if the trust value goes up to $100 million at the time of death, the family could save $40 million in estate taxes at the current 40% rate. This is just the federal tax savings. There are also state estate-tax savings in states like New York that continue to levy their own estate taxes.
Do a careful analysis with your estate planning attorney before you design a gifting program. Make sure that you have enough to maintain your lifestyle. There are instances where people are so eager to gift their assets they don’t plan for the impact of inflation or volatile markets.
With strategic planning and professional guidance, you can minimize the impact of estate taxes and secure your wealth for future generations. At Vick Law, P.C., we specialize in helping individuals and families navigate the complexities of estate planning, including tax-efficient strategies. If you're seeking to minimize or avoid estate taxes or have questions about your estate plan, don't hesitate to reach out to us. Your financial future deserves the right plan, and we're here to help you build it.
Reference: The Wall Street Journal (Aug. 19, 2023) “The Moves Wealthy Families are Making to Skirt Estate Taxes”
