Easing the burden for the people you love is one of the biggest reasons people engage in estate planning. For some families, estate taxes can be a serious burden, especially if the estate doesn’t have many liquid assets.
Estate taxes haven’t been an issue for many people since the estate tax exemption increased dramatically in 2018. As of 2022, the current exemption amount is $12.06 million, the highest it has ever been.
The exemption will revert back to $5.49 million in 2025 if it isn’t renewed. Lowering the federal estate tax threshold is one of President Biden’s priorities.
If the estate tax exemption reverts back to its earlier threshold (or is reduced even further), many families will suddenly have to think about estate taxes and how to avoid them.
What is estate tax?
An estate tax is a tax that’s assessed on the value of a deceased’s person’s estate. Estate tax can be levied by the federal government or by a state government.
An estate tax is generally assessed only on estates whose value exceeds a certain threshold. As we discussed above, the current threshold for federal estate tax is $12.06 million. So any estate valued at less than $12.06 million does not have to pay federal estate tax.
If an estate’s value exceeds $12.06 million, the estate is only taxed on the amount above that threshold. If an estate is worth $13 million, the estate would only pay estate tax on $940,000. The estate tax percentage also varies based on the value of the estate. The percentage increases as the value of the estate increases.
If your estate exceeds the threshold by $1,000, your tax rate is 18%. Compare that to an estate that exceeds the threshold by $1 million. Their tax rate is 40% (the highest tax rate).
Most states — including Georgia — do not have a state estate tax.
You may have also heard of an inheritance tax. That’s a tax that each beneficiary has to pay on their inheritance. The good news is that you don’t have to worry about avoiding an inheritance tax. The federal government does not assess an inheritance tax, and neither does the state of Georgia.
See: Estate Planning for High Net Worth Individuals
How to avoid estate tax
The goal of your estate plan isn’t to strap your loved ones with a big tax bill. You want to ease their burden and make sure your assets are distributed and used well.
That means you need to plan now to safeguard the future.
Give monetary gifts during your life
Gifting money to friends and family is a great way to reduce the size of your estate. You can give any individual up to $16,000 tax-free. And if you’re married filing jointly, you can increase that number to $32,000.
You can give to as many people as you want as long as your total lifetime gifting doesn’t exceed $12.06 million (as of 2022). After that, the federal government will levy a gift tax.
Make these gifts strategically to keep the value of your estate below the estate tax threshold.
See: Creating a Digital Assets Estate Plan
Donate money to charity
While you’re alive, you can donate as much money as you want to charity — and enjoy tax breaks for it. You can also reduce the size of your estate by setting up a charitable trust.
Both charitable lead trusts (CLT) and charitable remainder trusts (CRT) can help you reduce your estate tax burden. Here’s how they each work: With a CLT, you set aside assets for a charity in a trust. The charitable organization gets consistent revenue while you’re alive. Any assets that remain when you die go to your beneficiaries.
A CRT is an irrevocable trust that holds an appreciable asset (or more than one). You make income from that asset while you’re alive. When you die, the remainder in the trust goes to the charity you named as beneficiary.
Create an irrevocable life insurance trust
Irrevocable life insurance trusts (ILITs) are irrevocable trusts that hold a life insurance policy while the grantor is still alive.
The primary benefit of an ILIT is that it keeps the death benefit from your life insurance policy out of your taxable estate. So your beneficiary receives the funds without having to pay estate taxes on them.
ILITs have the added bonus of making liquid assets more immediately available to your beneficiaries. This benefit can be especially helpful for families whose assets are largely tied up in real estate or other non-liquid ventures.
Setting up an ILIt isn’t something you do without thinking it through carefully (since it’s irrevocable), and it’s not something you can do at the last minute. If you die within three years of creating an ILIT, the death benefits remain part of your taxable estate.
See: What Is an Irrevocable Life Insurance Trust?
Set up a family limited partnership
Family limited partnerships can be a good estate planning option for families who have shared assets, like a family business or a family property. You serve as the general partner, and your family members are the limited partners.
Because they also own a portion of the asset, the entire value of the asset isn’t included in your estate.
See: Succession and Estate Planning for Family Businesses
Avoiding estate taxes requires careful planning and a close watch on the changing estate tax laws. Schedule a phone or video consultation with Siedentopf Law to discuss your estate planning options.
