Top Tax Strategies for Estate Planning
The rewards of comprehensive estate planning comes with the challenge of understanding and appropriately leveraging the laws surrounding estate taxes. The good news is North Carolina’s estate tax and inheritance tax were repealed in 2013. However, that doesn’t automatically ensure your beneficiaries receive your hard-earned assets trouble-free—Federal taxes, capital gains tax, and income tax must still be considered.
The expert estate planners at Craig Associates, PC, are here to discuss the intricacies of estate tax laws, how these taxes impact the finances of heirs, and the estate planning tax strategies you can use to reduce the taxable estate.
Give us a call at (828) 258-2888 for an initial case evaluation, or register for one of our free estate planning seminars. We share our professional insight on estate planning tax strategies and help the Asheville community and surrounding areas develop estate plans to ensure their loved ones are provided for, and their financial legacy is secured.
- Why choose us?
Why choose us?
Chris Craig and his team did a very professional and efficient job of estate planning for my wife and myself. They were always responsive, timely and ensuring we understood every step of the process we were undertaking. The end result was a first rate estate plan that will serve our family well for years to come. I also don’t want to underestimate the importance of protecting and ensuring your assets go where you want and need them to in a solid legal framework.Bob F. | Asheville, NC
Learn some estate planning Legalese.
Exemption: Exemptions are like special discounts that you can take off your income when figuring out how much you owe in taxes; exemption is one of the estate planning tax strategies you can use in estate planning.
Mandatory Licensing: This is a legal requirement to ensure your estate planning tax strategies are overseen by a professional.
Estate Tax Liability: This is how much taxes are owed after you add up the total value of your estate; it can be lowered with estate planning tax strategies.
Financial Advisor: A professional who helps clients manage their money and can assist in estate planning tax strategies.
Probate: The legal process in which the court reviews someone’s will after they die to make sure everything is legal and fair or decides how assets are distributed if there was no will.
Expenses: The money spent on something—may be lowered with estate planning tax strategies.
S Corporation: A type of company that doesn’t have to pay taxes; the owners of the company each pay taxes on their share of the profits for federal tax purposes.
Traditional IRAs: Individual Retirement Accounts (IRA) lets you save money for when you retire, and the money isn’t taxed until you take it out.
Trust Funds: A fund with money or assets intended to provide benefits to an individual or organization and overseen by a trustee on behalf of the beneficiary. Trusts are some of the most efficient estate planning tax strategies.
Head of Household: A tax term for someone who is not married but has dependents (like kids) and looks after a home for them.
Investment Advisor: A type of financial advisor who manages investments that help clients use their money to make more money and can help with estate planning tax strategies.
Roth IRA: This is a type of retirement bank account where you pay taxes on the money you put in, but you don’t pay any taxes when you take the money out after you retire.
Flexible Spending Accounts (FSA): A special bank account—similar to Health Savings Accounts (HSA)—where you can save money to pay for healthcare expenses. The money you put in isn’t taxed and FSAs could be part of your estate planning tax strategies.
401(k): A retirement savings plan sponsored by an employer that lets employees save and invest some of their paycheck before taxes are taken out. 401ks are accounted for in estate plans and estate planning tax strategies.
Rate of Return: The gain or loss on an investment over a specified time period. If you put $100 into a bank account and a year later you have $105, your rate of return is 5%.
Qualified Personal Residence Trust (QPRT): A type of irrevocable trust and part of estate planning tax strategies that allows you to remove your house(s) from your estate to lower the tax value of your estate.
Tax Advantage: Estate planning tax strategies like donating to charity or certain accounts that gives you a break on your taxes.
Revocable Trusts: A living trust and one of the estate planning tax strategies that can be changed or terminated by the person who created it during their lifetime.
The Definition of Estate Taxes
A “death tax” or estate taxes are taxes owed when transferring assets after death and encompass just about everything a person owns, making effective estate planning tax strategies key to preserving as much wealth as possible. In North Carolina, only estates valued over $12.06 million are subject to federal inheritance taxes, and if your estate generates an income of more than $600 million per year, it is taxed as a separate entity under ordinary income tax rules.
How Estate Taxes Work
Estate taxes are calculated based on the net value of an estate, which is the total value of all assets minus any debts or mortgages owed at the time of death. The remainder of the estate is then divvied as stated in the will or, if there is no will, according to state laws of inheritance—definitely the worst-case scenario!
Legitimate estate planning tax strategies are crucial to maximizing the wealth you pass on to your heirs and beneficiaries. An estate planning attorney can explain relevant estate planning tax strategies to reduce the tax burden and ensure your wishes are carried out.
Financial implications of not using estate planning tax strategies
Taxes can quickly eat into assets you’ve set up for your loved ones. Managing tax obligations can be complex—it requires an accurate appraisal of the total estate value, which isn’t always straightforward. If a large portion of the estate is tied up in non-liquid assets such as a business or real estate, the beneficiaries may not have enough liquid assets to cover the tax liabilities, potentially forcing them to hastily sell off assets to cover tax bills.
The effects of estate taxes on beneficiaries
The goal of estate planning tax strategies is not just to preserve as much wealth as possible for future generations; it is also to save your beneficiaries from confusion and stress. Aside from the monetary impact of taxes, dealing with tax issues adds to the distress of those grieving a lost loved one. Consider also the costs of your beneficiary hiring an attorney, accountant, appraiser, or tax advisor to help them navigate hurdles after the fact. It is clear that hiring a professional estate planner and employing estate planning tax strategies to prioritize your family is the most cost-effective and stress-free option.
Estate Planning Tax Strategies
Here are some strategies commonly used in estate planning to reduce tax obligations.
Gifts during one’s lifetime
One of the most straightforward estate planning tax strategies to reduce the taxable estate is getting rid of it. You and your spouse (if applicable) can each give anyone else—including friends, family members, or even strangers—up to $15,000 a year without incurring the gift tax.
Giving away assets during your lifetime decreases the value of your estate and the amount of taxes it may accrue. Plus, you get to see your loved ones benefit from your generosity during your lifetime.
Estate planning tax strategies such as charitable giving is another excellent way to reduce taxes. Donations to qualifying non-profit organizations aren’t subject to estate or gift tax; these donations can lower your taxable income during your lifetime if you itemize your deductions rather than taking the standard deduction.
Using the marital deduction
The unlimited marital deduction is one of the critical estate planning tax strategies for married couples. Anything you leave to your spouse is exempt from estate taxes, no matter how valuable, even if it’s the entire estate. This method does not reduce the amount of the estate that may eventually be taxed, but it defers the tax until your spouse’s death.
Irrevocable life insurance trusts
Life insurance proceeds are generally free from income tax, making them sound estate planning tax strategies for many families. Still, unless managed correctly, they can greatly inflate the estate’s size. An irrevocable life insurance trust (ILIT) set up by your estate planning attorney keeps your life insurance proceeds separate from your estate; your beneficiaries receive the proceeds income-tax-free.
Spousal Lifetime Access Trust (SLAT)
A Spousal Lifetime Access Trust (SLAT) is often included in estate planning tax strategies to minimize tax impacts and easily transfer your assets to the next generation. It’s a type of irrevocable trust option where one spouse makes a monetary contribution (effectively reducing the value of your estate) into a trust to benefit the other spouse and possibly other beneficiaries. Federal lifetime gift and estate tax exclusions also apply to SLATs.
Advanced estate planning tax strategies
More advanced estate planning tax strategies are appropriate for some families; an experienced estate planning professional can help you take advantage of lesser-known options such as the following.
Establishing a Family Limited Partnership or LLC
A Family Limited Partnership (FLP) or a Limited Liability Company (LLC) are legal entities that can be used to distribute the estate’s assets among family members to reduce the taxable value of your estate. An FLP or LLC can be particularly useful when the estate consists of a business or real estate properties. Using estate planning tax strategies like an FLP or LLC can help manage and protect your family’s assets against creditors. Creating FLPs or LLCs requires meticulous planning and proper execution to avoid unwanted tax consequences, and the law surrounding these entities is complex, making hiring a knowledgeable attorney paramount to avoiding potential pitfalls.
Setting up a Grantor Retained Annuity Trust
A Grantor Retained Annuity Trust (GRAT) may also be one of the estate planning tax strategies your estate planner suggests after a case evaluation. A GRAT is another type of irrevocable trust that helps minimize the taxable value of a large financial gift to family members. The GRAT allows the grantor to receive an annuity (income) from the trust for a specific number of years. At the end of this period, the remaining assets pass tax-free to the trust beneficiaries, usually the grantor’s children.
The first step in determining the optimal estate planning tax strategies is building an effective estate plan.
Drafting an effective estate plan
Drafting an efficient estate plan involves:
- Making crucial decisions about your beneficiaries
- Creating trusts
- Choosing executors
- Setting up powers of attorney, among others
A well-crafted estate plan should also consider potential changes to tax laws and which estate planning tax strategies will best limit those impacts. You should also plan to review and update your estate regularly to reflect your current wishes and accommodate life events, such as divorce or the birth of a new family member.
The role of Estate Planning Attorneys
Expert estate planners have the requisite knowledge and experience to ensure your estate plan is legally sound and advise you on the most appropriate estate planning tax strategies to structure your estate and navigate complex tax laws. Your estate planner can help prepare all the legal documents to ensure no part of your estate is overlooked.
Let us help you plan your estate to preserve your wealth
We want you to keep your hard-earned assets and have used effective estate planning tax strategies to help our clients do just that for over 18 years. Register for one of our free estate planning seminars to get a head start on creating your estate plan, and call Craig Associates, PC at (828) 258-2888 when you’re ready to secure your financial future.