Estate Planning Tax Strategies


If you’re unmarried, you can have over $5 million in assets without your heirs having to pay estate taxes. This could lead you to think that estate planning is only for the super wealthy. But that assumption is wrong.

An estate plan is your chance to provide direction for how taxes, debts, probate fees, and related costs will be taken care of when you’re gone. It will offer you a chance to designate a guardian for any children you leave behind and give instructions for your living family members’ living expenses.

Without deciding all of this ahead of time, the court will choose for you. Working with an professional will be your ticket to sorting out the complexity of estate planning. If you don’t create your estate plan properly, no one wins.

While you may think of doing your estate plan yourself, that option has some serious risks. The law can be confusing, and given the dangers of not planning your estate correctly, it’s better just to get it done right the first time. Let’s go over some strategies to ensure this happens.

Estate Tax Planning Strategies

Creating your Will

This is the most logical first step in estate planning, but a surprising number of Americans don’t make a will. Over half of them don’t create one, and some don’t even think it’s necessary to have a will. But without this essential document, your assets will be divided by probate, a process that might leave your loved ones with a large bill.

The executor of your will is to ensure any creditors or debts are paid off and that your property and money are distributed as you wanted them to be. In order to make sure your desires are carried out when you pass on or become incapacitated, you’ll want to create a will in writing, signed, and legally legitimate. If it doesn’t fit these criteria, your instructions might not be fulfilled.

Designating your Beneficiaries

Not every asset you leave behind will be disbursed through your will. Life insurance policies, retirement funds, and other similar accounts allow owners to name beneficiaries. If a beneficiary is not named, the account will end up in probate court with a judge deciding who the money will go to.

Make sure you have designated beneficiaries for these accounts and keep this information updated. Each time a major life event occurs, such as a divorce, marriage, or childbirth, look the information over again. Too many people make the mistake of forgetting to do this and their assets end up where they wouldn’t have wanted them.

Setting Up a Trust

If your estate is generous or you have heirs in mind who may not be responsible with the assets you leave behind, a trust can be a smart strategy. This will allow you to appoint someone to distribute your wealth when you pass on. You can set up a trust in many ways, but irrevocable trusts tend to offer more tax benefits.

Once you’ve put money into this type of trust, the assets are no longer yours and instead belong to the trust. Because of this, that money can’t be subjected to estate tax. While the money is ultimately controlled by the trustee, you are the one who places stipulations on this and even while you’re still alive, it can be distributed.

The trust will still owe taxes on interest, income from dividends, and any other sources that apply. And trust tax rates may be higher for the individual. This is one reason why people should take care of costs from their trust, when they can. If you want to help your son make a house payment, for instance, you might want to use money from a trust instead of cash from your checking account. This will mean the income is taxed at the tax rate of the beneficiary, which may be lower, instead of the tax rate of the trust.

Consider Converting Retirement Accounts

Many people aren’t aware that 401(k)s and traditional IRAs will be subjected to income tax when they aren’t passed onto a spouse. They think that the amount that’s in their IRA will go directly to their beneficiary. But the truth is, this money will be taxed. While these taxes can currently be spread out over the years for the beneficiary, this could change later.

People could potentially be forced to take their money within a shorter period of time. Instead of allowing for a person to stretch taxes and payments over their lifespan, this could mean that IRAs must be cashed out and taxed within a five-year period.

Converting your traditional retirement accounts to Roth accounts (with tax-free distributions) over time is one potential solution. This can allow you to leave your beneficiaries without this extra tax bill. By making multiple conversions over a period of years, you can avoid being in a higher tax bracket, limiting the conversion each year.

While You’re Still Alive, Gift the Money

Instead of letting the chips fall where they may once you pass on, you could keep your money in the family by gifting it to your heirs during your life. In 2018, the IRS will allow you to give $15,000 or less per year, per person as a gift. This money will be free from taxes for the recipient.

“After five long years of being at $14,000, it appears the §2503 gift tax exclusion amount will increase to $15,000!” said Joseph J. Ecuyer, legal editor and taxation expert. “Be on the lookout for an upcoming Estate, Gifts & Trust blog highlighting all the inflation adjustments that impact EG&T practitioners.”

Another method for reducing the value of your estate is using charitable donations. The constantly evolving tax code and complex strategies make estate planning seem like a chore to many. But ignoring this subject can come back to bite you and your loved ones down the road. Estate planning is a must for absolutely everyone.

Call our Estate team at (480)467-4325 to discuss your case today.

Contact The JacksonWhite Estate Team

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