Trust and Estate Tax Planning for Future Generations

estate tax planning
October 24, 2023

You have worked your entire life to ensure your loved ones are financially secure well into the future. However, the estate you leave behind can be impacted by a range of taxes that come into play when your assets are transferred to your beneficiaries. 

Estate taxes, inheritance taxes, and gift taxes should all be thoughtfully considered when it comes to estate planning and taxes in general. Therefore, with an experienced partner like Waters Hardy, they can lead the way when it comes to innovative strategies to minimize the financial burden. Estate planning requires a detailed eye on your unique financial situation. Also, there is not a catch-all solution to minimize taxes. As a result, the best tax and estate planning strategies begin with a conversation with our experienced team. 

Let’s explore various factors to consider for estate planning tips to ensure your loved ones are taken care of without any additional financial hurdles.  This is helpful information, especially if you are in the early stages of taking stock of the assets you plan to pass on to future generations.  

Do You Have to Pay Taxes on Estate Inheritance? 

The answer to this question depends on the total value of your assets. In 2023, the Internal Revenue Service levied a federal estate tax on assets with a fair market value of $12.92 million or more at the time of an individual’s death. Also, this amount is doubled for married couples. The federal estate tax can range from 18% to 40% and is imposed after the exemption limit (in this case, $12.92 million) is met.  

It should be noted, though, that the $12.92 million is not a stationary number. The higher exemption amount was set during the 2017 Tax Cuts and Job Acts. Furthermore, that tax exemption is expected to be lowered to historical levels of around $5 million when the Tax Cuts and Jobs Act sunsets in 2026. 

Bear in mind, too, that the estate tax does not just consider your savings or other monetary assets, as the IRS considers your assets to include any or all of the following: 

  • Real estate 
  • Stocks and bonds, or other investments 
  • Cash 
  • Life insurance or annuity contracts 
  • 401(k) and additional retirement accounts 
  • Personal property, such as vehicles, household furnishings, artworks, etc. 

The $5-$12 million mark may seem high. However, if you’ve built a substantial nest egg over a lifetime, your risk of exceeding the exemption limit might be greater than you thought.  

Estate Tax Versus Inheritance Tax 

An inheritance tax is levied by the state instead of the federal government, and it’s a tax paid by the individual beneficiaries instead of the overall estate itself. Only a handful of states have an inheritance tax, but this could change over time. As of 2023, only one state – Maryland – has an inheritance and estate tax in play. 

Gift Tax 

In addition to the inheritance tax and the estate tax, a gift tax may also be a factor when distributing your assets.  

Simply put, every time an individual gives a financial gift during their lifetime, the giver could be subject to a tax if the gift amount exceeds the exemption. (In 2023, that limit is $17,000 per recipient.)  

Gift taxes above this exemption amount aren’t always subject to a tax. However, a gift tax may not apply to gifts made to your spouse or a charitable organization. It also doesn’t apply to medical and educational expenses paid directly to the respective institution.  

Estate Planning Tips to Minimize Taxes 

The good news is that there are several different strategies you can employ during your lifetime to minimize the taxes that your beneficiaries and future generations will have to pay. Your wealth and tax advisor can help you determine the right moves for your distinctive financial situation. Let’s learn more about these tax saving strategies.  

Give Financial Gifts on an Annual Basis During Your Lifetime 

Suppose you intend to leave a substantial financial sum after your demise. In that case, you can reduce this amount by giving smaller amounts to your loved ones and beneficiaries during your lifetime, provided they are under the $17,000 per individual exemption limit. This may not seem like a large amount of your overall estate, but it can add up over time. This is especially true if you have a number of beneficiaries you intend to account for.  

For example, if you have ten grandchildren who will eventually benefit from your estate, you can give them each $17,000 every year, for a total of $170,000 annually. This is in addition to any charities or political organizations you contribute to are generally considered non-taxable gifts.  

Set Up an Irrevocable Trust 

An irrevocable trust ensures that your assets are outside of your estate. Additionally, there are many options when it comes to different types of irrevocable trusts that can benefit you and your loved ones. Many of these irrevocable trusts have distinctive features that help minimize any future tax burdens. For instance, allowing the grantor to pay any income taxes owed on assets so they are not taxed when it’s time to distribute them to your heirs. 

Consult with a Professional Tax Advisor Regarding Your Estate Planning 

The best thing an individual can do to minimize any financial burden left behind to loved ones is to consult with an expert in tax planning. At Waters Hardy, we handle all aspects of tax planning and preparation, from your annual federal and state tax returns to the assets you’ll leave behind for future generations. 

Reach out to us today. Let’s start a discussion of how we can ensure that all estate-related taxes are minimized so that your loved ones are well protected. With a few smart moves and strategies in place, you can enjoy ample peace of mind that the assets and funds that you worked so hard to build will go to the people and beneficiaries that you love the most.  

Invest in the future of your loved ones. Take proactive steps in estate tax planning now to ensure a secure legacy for generations to come.  

Contact us today. 

Pin It on Pinterest