What Are the Best Practices for Reducing Estate Taxes in Large Estates?

What is the Impact of Estate Taxes?

Your estate will be exposed to estate taxes upon your demise before the assets therein can be distributed to your beneficiaries. The Internal Revenue Service (IRS) highlights that estate tax is taxable on the “right to transfer property at death,” which sometimes leads people to refer to it as a “death tax.”

One significant impact of estate taxes is that they reduce the overall value of your estate that your beneficiaries can inherit. Estate taxes can also complicate the transfer process, especially if your heirs are not conversant with inheritance laws in California. Estate planning lawyers in Elk Grove recommend implementing a few strategies that can effectively reduce estate taxes.

With proper planning and execution of the following plans, you can maximize the wealth you leave behind and ensure a smoother transfer of assets:

Consider Marital Transfers

Lifetime gifts and bequests in a Will are not subject to estate taxes if you transfer them to a surviving spouse. The only exception is if your spouse is not a U.S. citizen. The tax exemption that comes with transferring your marital assets to your spouse can defer payments due to the IRS. While the exemption may not eliminate estate taxes, it puts off the tax bill the estate may face.

After the second spouse’s demise, the taxes owed on the entire estate become due, including the assets transferred upon the first spouse’s death. Consult extensively with skilled California tax planning attorneys to thoroughly evaluate if this is a viable option for the type of assets on your estate plan and how it will affect your beneficiaries in the long run.

Gifting Family Members and Minors

The law allows married couples to give away a specific amount in tax-free gifts to other people who could be family members. Each spouse can donate this amount separately each year to reduce the value of their taxable assets to benefit the intended beneficiaries.

Under federal laws, you could also give tax-free gifts to minors up to a specific amount:

• According to the Uniform Gifts to Minors Act (UGMA), you can gift minors with financial assets such as cash and securities even if the minors don’t have a formal trust or guardianship
• The Uniform Transfers to Minors Act expands the UGMA and allows the gift of real property and financial assets to minors.

Gifting family members and minors ensures more of your assets go to your loved ones rather than estate taxes. What you give as gifts is not counted as part of your estate.

Charitable Giving

Donating to charitable ventures you care about can be a source of fulfillment. Additionally, it can be an effective means of tax planning in the year you’re donating while potentially lowering the value of your estate. You can donate to a donor-advised fund (DAF) and itemize deductions on your annual income tax return for the year you contributed.

Tax planning lawyers in California explain that from an estate tax viewpoint, assets left to a qualified charity upon your demise are deducted from your taxable estate. Consider donating long-term appreciated securities such as bonds, stocks, and mutual fund shares held for a year or more and deduct their fair market value without paying capital gains tax.

Designate Beneficiaries

Designating beneficiaries on different types of assets is probably the smoothest way to transfer property. Retirement plan assets such as 401(k)s and IRAs allow you to designate one or more beneficiaries, and the process is simple with the guidance of experienced tax planning lawyers in California.

Without beneficiaries, the IRS requires that inherited retirement accounts be distributed on an accelerated basis that could extend to five years and result in increased tax liabilities. The beneficiary you designate on these accounts takes precedence over anyone you name in your Will.

Buy Life Insurance

Life insurance benefits are tax-free and paid directly to one or more beneficiaries. The beneficiary can be a specific person or a trust, and the beneficiary could use the proceeds to pay off existing debts owed on the estate or funeral expenses. Without the proceeds, your estate executor would probably have to sell your property to offset the bills, reducing the inheritance for your loved ones.

With life insurance, your estate can pay the taxes on your capital gains and income unless the estate is substantial. Once you buy life insurance, you can name one or more beneficiaries in the policy and change them without their consent unless the designation is irrevocable.

Set Up a Trust

Tax planning attorneys in California recommend setting up a trust in your estate to avoid estate taxes. The document distributes your assets to beneficiaries by transferring them to a trustee. Unlike Wills, trusts are exempted from the probate court process. With the help of your Elk Grove estate planning attorneys, you can consider setting up the following types of trusts:

• Marital trusts
• Irrevocable life insurance trust
• Qualified personal residence trust
• Charitable lead trusts
• Charitable remainder trusts
• Grantor-retained annuity trusts
• Asset protection trusts
• Dynasty trusts
• Bypass trusts
• Land trusts

Consult with knowledgeable estate planning attorneys for an overview of each type, the potential benefits, and the downsides, if any. With this information, you can make a plan from an informed viewpoint.

A Skilled Estate Planning Lawyer Helping You Minimize Estate Taxes

Estate taxes reduce the assets your heirs can receive after your demise. Luckily, skilled tax planning lawyers in Elk Grove can help you implement various strategies to minimize estate taxes and preserve a more significant portion of the wealth for posterity.

Cava & Faulkner is an estate planning law firm with dedicated tax planning lawyers in Elk Grove. We can help you optimize your tax situation to protect your assets and ensure you have substantial assets to pass on to your loved ones without legal complications. Call us at 916-813-7565 to schedule a FREE consultation.