The Importance of Estate Planning to Lower Taxes and Maximize Benefits 

estate planning taxes
May 30, 2023

You may have taken detailed steps to ensure that your loved ones are taken care of well into the future. That’s why you need to start with strategic estate planning. This could include drafting a will, naming an executor, and essentially doing the legwork to ensure that your life’s earnings and assets benefit the friends and family members who are most important to you. 

But what about potential estate taxes? 

Depending on the funds, retirement accounts, real estate, and other assets you leave behind, your loved ones may be unfortunately surprised by hefty taxes on their inheritance. Estate planning and taxes are an ever-changing landscape as tax laws evolve from year to year, and an expert estate planning guide is your best resource to ensure that your hard-earned wealth goes directly to those you love.  

In the meantime, however, it’s helpful to understand the estate planning basics and how taxes may play a role, and that starts with a foundational understanding of estate taxes, which may be impacted, and how you can minimize these taxes while maximizing your benefits. 

What is Estate Tax & How Does it Work? 

The estate tax is a tax that is passed down to your heirs if the value of your overall estate – including funds as well as property – is over a specific amount. The estate tax can apply on both a federal and state level. Additionally, the federal estate tax has an exemption that has, historically, increased every year. 

In 2022, that exemption was $12.06 million (or $24.12 million for married couples), a noticeable increase from previous years. This is because the Tax Cuts and Jobs Act of 2017 made several significant changes to the individual income tax, which included an increase in estate tax exemption amounts. 

It should also be noted that heirs will only be taxed on amounts that exceed the estate tax exemption. For example, a person who inherited a $20 million estate from an individual parent in 2022 will only need to pay estate tax on the $7.94 million above the exemption amount. 

However, there are some limitations, especially since the exemption amounts may not always increase from year to year. The 2017 tax law mentioned earlier, only increased the exemption amounts through 2025. Therefore, after 2025, it is highly probable that the exemption amounts will revert to pre-2017 levels, which hovered around $5.5 million for individuals. 

How Can You Reduce Your Estate Taxes? 

The good news is that there is a lot you can do to remove the estate tax burden from your loved ones. The smartest first step is reaching out to our team at Waters Hardy to receive individual assistance and professional guidance on your unique tax situation. In the meantime, consider the following options and ideas for minimizing or eliminating a possible estate tax. 

Reduce Your Assets  

This seems like an obvious move, but spending or distributing your assets in advance may help get your total estate under the exemption amount. Under federal law, an individual can give gifts up to $16,000 a year (as of 2022), without a gift tax requirement. So, consider giving your heirs annual monetary gifts instead of a lump sum in your eventual estate. 

Make Charitable Gifts 

In addition to providing annual gifts to your heirs, you can make tax-free charitable donations throughout your lifetime. When it comes to qualified organizations, there is no limit to how much you can deduct from your tax returns.  

However, there may be additional rules and considerations to take into account. For example, it’s essential to understand the differences between qualified and non-qualified organizations, as when it comes to non-qualified organizations, the donation limit is typically 60% of your gross income, with the remaining donation amount taxable. 

Set Up a Trust 

A trust can be beneficial in a variety of ways, which includes tax benefits. When your assets are transferred into an irrevocable trust, these assets belong to the trust itself and are not subject to a future estate tax. However, this can be a detailed process and professional guidance will likely be required to ensure protection for you and your heirs. 

Move to a State that is Free of the Estate Tax 

You may not be able to avoid the federal estate tax, but if you are considering retirement in a new location, you can potentially eliminate the state tax. 

Currently, there are 13 states that have an estate tax, and these states include the following: 

  • Connecticut 
  • District of Columbia 
  • Hawaii 
  • Illinois 
  • Maine 
  • Maryland 
  • Massachusetts 
  • Minnesota 
  • New York 
  • Oregon 
  • Rhode Island 
  • Vermont 
  • Washington 

Moving to a state without an estate tax can eliminate these costs but remember that state laws may change in the future. In addition, there may be extra steps required to officially establish residency. Therefore, if you own properties in different states, use caution and enlist an expert to ensure that your varying real estate assets do not impact your estate tax.  

Get Expert Assistance on Estate Planning from our Tax Professionals  

The estate tax can cause an unintended burden on your loved ones and can negatively impact what you leave behind after a lifetime of hard work and effort. In addition to taxes, there are a number of other factors to consider with estate planning. Therefore, an expert hand is required to ensure that your loved ones’ inheritance is transferred smoothly. 

Based in Dallas, Texas, Waters Hardy can assist you with all the intricate details of estate tax and ensure that you and your loved ones are well prepared now and for any changes ahead. Tax laws are fluid, and so are your finances and financial situation, so partner with our tax professionals to help you navigate through these adjustments to prepare for the years and decades ahead. 

You worked hard to build your assets, and they should be protected for the short-term and the long-term.

Reach out to us today for a free consultation.   

Let’s start a conversation about how we can make sure you and your estate are protected, no matter what the future brings. 


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