Estate and Tax Planning: Knowing The Difference • Learn with Valur

Your taxes are too high. But, unsurprisingly, there’s more to it. Critically, optimizing your tax situation depends on your goals. Are you planning to:

Use your earnings during your lifetime (what we call “tax planning”)?
Pass assets to your kids in a tax efficient manner (”estate planning”)?
Preserve assets for your eventual grandchildren or future generations (”dynasty planning”)?

The potential solutions for — and potential gains from — each kind of planning are different. Let’s talk about those differences and how you can take a tactical approach to optimizing your taxes.

What Is Tax Planning?

Tax planning can reduce your income and capital gains taxes so you can keep and reinvest as much as possible for use during your lifetime
Tax planning strategies range from the basic tools you can access via TurboTax — the mortgage interest deduction, the childcare credit — to dedicated legal structures like IRAs and Charitable Remainder Trusts

Tax planning is a set of methods that reduce the taxes you pay on your assets and income. This is achieved by leveraging various strategies that (1) maximize tax breaks and (2) legally minimize the amount of income that is exposed to taxation in the first place.

Tax rules can be complicated, but the impact of planning can be massive. In a progressive tax system like the United States, tax planning is the reason why the richest 400 Americans are able to pay a lower tax rate than the bottom 50% of Americans.

Common forms of tax planning for Americans include charitable deductions, pre-tax investment accounts, and charitable trusts.

How you can minimize your income tax

At Valur, we offer tax planning solutions for:

Deferring the taxes on unrealized investment gains
- Charitable Remainder Trusts: Defer taxes on unrealized capital gains up to the length of your life (Phil Knight has given ~$890m of Nike stock to charitable trusts for the tax advantages, for example).
- Opportunity Zones: Defer taxes on realized capital gains until 2026 and avoid capital gains taxes on appreciation in real estate investments in government-specified areas
Reducing the taxes on already realized income such as salary, bonuses, or capital gains:
- Charitable Lead Annuity Trusts: Deduct up to 100% of your income in exchange for future charitable donations.

Estate Planning

Estate planning is a set of strategies that protect assets from taxation when you pass them on to the next generation
Estate planning strategies can range from the basic — a simple will or revocable trust designed to simplify the probate process — to more complex legal structures like Grantor Retained Annuity Trusts (GRATs) that protect assets from taxation

When does estate tax come into play?

Estate planning comes into play when you expect to pass on assets to future generations. Critically estate planning can be much more complicated when you plan to pass on more assets than are protected by the federal estate tax exemption — currently $12.92 million, or $25.84 million for a married couple. In those circumstances, it’s common to want to pass those extra assets to the next generation. If you do that without estate planning, though, you’ll face considerable federal and state estate taxes — often 40% or higher.

What are the various estate taxes?

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

Federal taxes

Federal transfer taxes include gift and estate tax. You are entitled to tax-free transfers up to the aforementioned federal limit. If you exceed that limit, though, you’ll be subject to taxes whether you are giving money or other assets away during your lifetime (gift tax) or when you pass away (estate tax). Importantly, gifts to your spouse are typically exempt from this kind of tax.

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 per person. Married couples can double that amount. However, it’s important to note that the exemption is scheduled to drop to $6.6 million when the Tax Cuts and Jobs Act sunsets in 2026.

How much are federal transfer taxes?

On the high end, federal estate taxes alone can reach 40%. This means that if you have $1 million over and above the federal 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 tax liability.

State taxes

States can levy their own estate and gift taxes in addition to federal taxes. In addition, although an inheritance isn’t considered income for federal tax purposes, some states deem an inheritance to be taxable income. State inheritance taxes — which must be paid by the person who receives the inheritance — can range from 0% to 18% and can be progressive, meaning that the larger the inheritance, the more you would owe.

Probate Fees

Probate is the legal process of administering the estate of a deceased person. The purpose of probate is to ensure that the assets of the deceased person are distributed according to the terms of their will or, if they did not have a will, according to the laws of the state in which they lived.

The probate process is typically overseen by a probate court, and it is usually necessary to hire an attorney to help with the process. The fees for probate can vary depending on the complexity of the estate and the amount of work that is involved in administering it.

How you can minimize your gift and estate tax

If you have or anticipate having a large estate, there are multiple ways to reduce the amount that will be taxable when you give it away.

Giving during your lifetime to reduce your taxable estate
Using irrevocable trusts to remove assets from your estate

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. Try our calculators to estimate your potential returns from these structures. Or get started at no cost and with no commitment.

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.