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Estate Planning: What’s Important To Know

  • Estate planning is work done to ensure that as many assets as possible are passed on to the next generation while minimizing estate taxes.
  • Key components of estate planning include the assets, expected appreciation and your expected lifespan
  • Estate planning strategies can range from the basic, living wills to more complex structures like Grantor Retained Annuity Trusts (GRATs) that enable people to pass on more than their lifetime gift exemption

How taxes have an impact on estate planning

Estate taxes comes into play when you gift (or expect to gift) more than the federal, $12.9m in assets, or state lifetime gift exemptions. Tax estate planning comes into play when you want to pass on those assets to the next generation but face federal/state estate taxes when doing so. When it comes to estate planning there are several types of taxes to be aware of, and plan around, and it’s important to note they can be especially punitive if they apply.

On the high end, federal estate taxes alone can reach 40%. This means that if you have $1 million over and above the estate tax exemption, you would owe $400,000 in federal estate taxes and leave $600,000 behind for your beneficiaries even before accounting for any state estate tax liability.

What is the Federal estate tax exemption?

Each individual has a lifetime estate or gift tax exemption, sometimes referred to as a basic exclusion amount. This exemption is the amount of assets you can give away, either over the course of your life or after your death, without being subject to federal estate or gift taxes. For 2023, it is $12.92 million/person. Married couples can double that amount.

However, it’s important to know the estate tax exemption level is scheduled to revert to historical levels of about $6.6 million when the Tax Cuts and Jobs Act sunsets in 2026.

Which taxes might come into play

Estate tax planning incorporates several types of transfer taxes at the federal and state level.

Federal taxes

Gift and estate tax. When giving money or other assets away you are subject to the gift tax if your lifetime gifts, including your remaining estate, exceed the federal exemption amount. Gifts to your spouse, if a U.S. citizen, are excluded from this tax.

However, there is an annual exclusion amount, or gift amount, that you can give before triggering gift taxes. In 2022, the annual exclusion amount is $16,000 per person, per year, or $32,000 for a married couple to any one person. There is no limit to the number of different gift recipients.

Generation-skipping transfer (GST) tax: If you give money to grandchildren or relatives two or more generations younger than you, or to a non-family relation more than 37½ years your junior, GST tax may kick in. For gifts that skip a generation and are outside the annual exclusion amount, GST tax applies the highest federal estate tax rate on the asset transfer.

State taxes

States can levy their own estate and gift taxes in addition to federal taxes. Some states have an inheritance tax paid by the beneficiary who inherited assets upon someone’s death. At the federal level, an inheritance isn’t considered income. But some states deem an inheritance to be taxable income. State inheritance tax rates can range from 0% to 18%, and can be  progressive, meaning that the larger the inheritance, the more you would owe.

How can you minimize your gift and estate tax burden?

If you have or anticipate having a large estate, there are multiple ways to reduce your taxable estate

Giving during your lifetime to reduce your taxable estate

With the annual exclusion limit for gifting, you can remove assets from your taxable estate each year by giving to your heirs. And you can foot the bill for medical bills or tuition without being subject to taxes so long as the payments are made directly to the medical facility or school.

While a $16,000 annual gift or tuition bill may not seem like much, consider:

A husband and wife have three married adult children and nine grandchildren, a total of 15 heirs (three children, three in-laws, nine grandchildren) and can give $32,000 to each heir without triggering any gift taxes. That means the husband and wife can remove $32,000 x 15 heirs = $480,000 from their estate each year.

Now, let’s assume each of the nine grandchildren is of school age and the husband and wife would like to fund each child’s $25,000 annual private school tuition by paying their schools directly. That’s $25,000 x 9 grandchildren = $225,000 that they also can remove from their estate without any tax consequences.

Combined, the annual gifts and tuition expenses allow the husband and wife to support their family while significantly shrinking their taxable estate by $705,000 every year.

You can also give to charity or 501(c)3 organizations (including your own foundation) to remove even more assets from your taxable estate each year.

Using irrevocable trusts to remove assets from your estate

Another way to reduce your potential future tax liability and shift assets out of your taxable estate is through irrevocable trusts. Many irrevocable trusts have unique advantages that can help minimize your future estate tax burden.

At Valur we offer various estate planning solutions, including:

  • Grantor Retained Annuity Trust (GRAT): Enables you to pass on assets to your kids without the gift counting towards lifetime exemption
  • Irrevocable Life Insurance Trust (ILIT): Hold a life insurance policy against your life but the payout goes to the beneficiaries without incurring estate taxes
  • Spousal Lifetime Access Trust (SLAT): An irrevocable trust where one spouse makes a gift into a trust to benefit the other spouse (and potentially other family members) while removing the assets from their combined estates
  • Charitable Lead Annuity Trust (CLAT): Similar to a GRAT, this enables you to pass on assets to your kids without it counting towards your lifetime gift exemption but also sends a large amount of the proceeds to charitable entities, often a family foundation
  • Passing on your IRA by using a CRT to replicate a Stretch IRA: A replacement for the Stretch IRA that enables you to pass on assets to your kids while they continue to grow on a pre-tax basis without a 10-year forced withdrawal.

Next Steps

As your goals and financial situation change, so does the right solution. Our goal at Valur is to democratize knowledge about these solutions and to make the planning process seamless, so that everyone can take advantage of the best wealth-building solutions for them.

About Valur

We built a platform to give everyone access to the tax and wealth building tools of the ultra-rich like Mark Zuckerberg and Phil Knight. We make it simple and seamless for our customers to take advantage of these hard to access tax advantaged structures so you can build your wealth more efficiently at less than half the cost of competitors. From picking the best strategy to taking care of all the setup and ongoing overhead, we make it easy and have helped create more than $500m in wealth for our customers.