Top 3 Ways to Protect Your Estate from Taxes

Owning property means you have an estate, but not all estates are large enough to be taxed under estate laws. However, if your estate exceeds certain thresholds set by federal or state laws, you might face estate taxes.

Estate tax is levied on a deceased person’s assets – including real estate, stocks, and retirement accounts – at both federal and state levels. It differs from inheritance taxes, which are taken after the estate is distributed to beneficiaries. Currently, the federal exemption is $13.61 million, meaning estates under this value aren’t taxed federally. In this article, we’ll discuss the top options to mitigate and avoid estate tax, which include making gifts or transfers to family members, setting up trusts, and establishing family limited partnerships (FLPs), each with its own rules and benefits.

Given the complexity of these options, consulting with an estate planning professional is important. These experts navigate intricate tax laws to outline the most effective strategies to shield your estate from tax liability, ensuring that your estate planning efforts meet your financial goals and legal requirements.

Looking Down the Road

Transfers and Gifts

One way to protect your estate and assets from estate taxes is simply to transfer your assets to another estate. Moving assets out of your estate can be done through various types of transfers:

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  • Marital Transfers: Gifting assets to a U.S. citizen spouse is tax-free and can delay estate taxes, though taxes will apply when the surviving spouse passes.
  • Family Gifts: Annually, couples can gift a set amount ($18,000 per person as of 2024) tax-free to others, lowering their estate’s taxable value.
  • Minors’ Gifts: Using acts like UGMA and UTMA, one can gift financial and real assets to minors within the annual tax-free limit.
  • Charitable Donations: Gifts to qualified charities are deductible and reduce the taxable estate, supporting causes while saving on taxes.

Trusts and Gifts

Trusts are powerful tools for asset distribution and avoiding estate taxes. In general, a trust is a legal arrangement for managing an individual’s assets by first transferring those assets to a trustee.

After the individual passes away, the trustee then distributes these assets to the beneficiaries as specified in the trust. Unlike a will, trusts typically bypass the probate process.

There are a few popular types of trusts, each with unique tax benefits:

  • Marital Trusts (A-B and QTIP): These trusts offer benefits for the surviving spouse and defer estate taxes until their death.
  • Irrevocable Life Insurance Trust: Keeps life insurance out of the taxable estate, preventing it from pushing the estate over exemption limits.
  • Qualified Personal Residence Trust: Allows couples to live in their home while moving it out of the taxable estate, with certain risks if the grantor dies prematurely.
  • Charitable Trusts (CLT and CRT): These trusts support charities either during the donor’s life or after, with benefits to the donor and charity.

Family Limited Partnership (FLP)

An FLP enables families to consolidate business interests or investments, allowing for strategic asset transfers within the family. This can potentially reduce individual estate sizes and overall tax liability.

Protecting More Than Your Estate

Estate taxes can significantly impact the wealth you pass on to your loved ones. To protect your family’s financial future, consulting with an experienced estate attorney in California, such as Hatley Law Group APC, can provide invaluable guidance on navigating complex regulations, as well as gift tax planning and advice. By taking the necessary steps to safeguard your estate, you can have peace of mind knowing that your loved ones will be properly cared for and financially secure.

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