There are four basic strategies for reducing estate taxes:
Within those four strategies are many options.
Not all will be appropriate for you. But there are quite a few strategies – and it’s always good to review which ones may be suitable.
If your estate plan was in place before 2018, and certainly if it was created before 2013, you need to revise it or at least have an estate planner review it carefully.
Suppose your will leaves $50,000 to charity, which two years ago was no more than 10% of your $500,000 in liquid assets.
Here are a few of the more important potential changes:
Wills with bypass trusts need to be reconsidered.
Fewer families will need them now, because of the higher estate tax exemption.
There still are cases when a bypass trust should be considered as part of an estate plan.
But in many cases, the bypass trust could produce results you don’t want under the new law.
Formulas in wills need to be rewritten when they determine the amount of an estate transferred to a bypass trust or when for any reason they refer to the estate tax exemption amount.
Under traditional formulas, the $11.4 million exemption will use all or the bulk of most estates.
Many surviving spouses will be impoverished under current wills.
If your estate plan has a bypass trust or formula clause, you need to visit an estate planner soon.
Don’t forget state levies. About 20 states have some form of estate or inheritance tax or both.
Often these have much lower exemptions than federal law and will be a more significant burden on your heirs. You might want to revise your will primarily to avoid these taxes.
Make tax-free gifts.
The wealthy or near-wealthy who have enough assets to pay for retirement should consider removing appreciating assets from their estates.
You want to remove future appreciation from your estate, especially when the assets are appreciating faster than the Consumer Price Index.
Otherwise you take the risk your future estate will be taxable.
You transfer more wealth tax free to heirs when you give property before it appreciates, especially when you can make those transfers free of gift taxes.
Even those with modest estates might want to make gifts when they live in states with high estate or inheritance taxes and they have enough to maintain their standard of living.
Income shifting is back.
With the higher gift-tax exemption, you can transfer a lot of income-generating assets or property with large capital gains free of gift taxes to family members.
When they family members are in a lower tax bracket than you, this keeps more after-tax wealth in the family.
Focus on non-tax issues.
For most of us, estate planning is about a lot more than tax planning.
For many, taxes aren’t even a significant consideration.
Your plan needs powers of attorney for financial and medical decisions when you’re unable to act, and perhaps a living will.
Determine if you have too much or too little life insurance.
Consider how your will should be worded to minimize family conflicts and prevent assets from being wasted.
There are other non-tax issues to consider, and I’ll discuss those in more detail in later issues.
PS: For more estate planning advice, secure your copy of my step-by-step workbook, To My Heirs: A Book of Final Wishes and Instructions. Claim your copy here.