In the financial planning community, there's a saying: “Don’t let the tax tail wag the dog.” This phrase humorously illustrates the idea of a dog’s tail wagging the dog, rather than the other way around. Similarly, when it comes to estate planning, you should prioritize your wishes for your estate over tax considerations. First, focus on your goals for your estate. Once you have a clear understanding of those goals, explore strategies to minimize your tax liability. In this article, we discuss estate planning strategies designed to reduce taxation.
Annual Gifts and Lifetime Exemption
Your fiduciary planner should have you on track for financial freedom in retirement, if you aren’t already there. If you have the financial capacity to gift assets to your family or favorite charity without jeopardizing your financial security, making annual gifts can be a simple way to reduce your estate's value. In 2024, the IRS allows annual gifts of up to $18,000 per person without incurring taxes. If you are married and file jointly, you can combine your allowances to gift up to $36,000 per person. Gifts at or below this amount do not trigger any taxable events. Historically, the annual gift tax exclusion has increased by $1,000 every 3-5 years due to inflation and other factors. The lifetime exemption has also risen annually and is currently $13.61 million. If you wish to give more than the annual exclusion amount, you can use the excess amount against your lifetime exemption by filing Form 709. Consult your tax advisor to guide you through this process.
Gifts to Minors or Education Plans
Annual gifting sets the stage for a more strategic approach to estate planning. Instead of gifting assets outright, consider gifting assets to minors through a Uniform Transfers to Minors Act (UTMA) account or a college savings plan. Both options take advantage of the annual gift exclusion and reduce the estate’s value.
With a UTMA account, assets are held for the minor until they reach the age of majority, typically 18 in most states. A college savings plan allows the use of gifted assets for private school tuition or higher education expenses. An additional benefit of education plan gifting is “super funding,” which permits a lump sum contribution up to five times the annual limit. In 2024, this means up to $90,000 can be contributed to a college savings plan.
For those needing to quickly reduce their estate, super funding can effectively support a child’s education while lowering the estate's value. However, some states with income tax may not allow deductions for the full lump sum contributed to a college savings plan. It is advisable to consult with a tax advisor for detailed information.
Family Limited Partnerships
Small businesses are often owned by individuals or couples and are valued as part of the estate upon the owner’s passing. A Family Limited Partnership (FLP) offers a strategic solution for high-net-worth individuals with small businesses. An FLP can facilitate business succession by owning the business and transferring partnership interests to family members, thereby removing the business’ value from the owner's estate. In addition to reducing the estate's value, an FLP also provides protection against creditors. It is advisable to consult with a tax advisor and attorney when considering a Family Limited Partnership.
Overall
Estate planning is not solely about reducing taxes, but can effectively address both your goals and tax concerns. Proper estate planning helps create a strategy that aligns with your wishes and minimizes taxes both during your lifetime and after your death. Working with knowledgeable professionals is essential to maximize these benefits.
If you're ready to get started, download our free Estate Planning Checklist! This simple checklist can help you begin the process of creating your estate plan. Contact CPS Investment Advisors or call (863) 688-1725 to chat with our team for assistance navigating your financial plan.
