Estate taxes can significantly reduce the wealth passed down to beneficiaries, making it essential for individuals and families to explore ways to minimize this financial burden. The federal estate tax applies to estates valued above a certain threshold, which in 2024 is $12.92 million per person. However, with careful planning, you can mitigate these taxes and preserve more of your estate for your heirs. Let’s explore some key strategies for minimizing estate taxes. However
- As of January 1, 2026, the current lifetime estate and gift tax exemption will be reduced by 50%, and adjusted for current inflation.
- If you are a family that may face an estate tax liability in 2026, you may benefit from transferring assets and their appreciation out of their estate sooner rather than later.
- There are several ways to structure an estate plan. Your attorney can help you identify which solutions might best suit your family’s unique needs.
1. Take Advantage of Lifetime Gift Exemptions
One of the most effective ways to reduce your estate tax burden is through gifting during your lifetime. The IRS allows you to give up to $17,000 annually (as of 2024) per recipient without triggering gift taxes. You can make gifts to multiple individuals, such as children or grandchildren, and reduce the overall size of your taxable estate. By making annual gifts, you not only help your beneficiaries during your lifetime but also decrease the amount of your estate that will be subject to taxation later.
Additionally, there’s a lifetime gift exemption of $12.92 million, which covers large gifts you make throughout your life. This exemption runs concurrently with the estate tax exemption, meaning any portion of the exemption you use for gifts will reduce the amount available for your estate.
2. Establish an Irrevocable Trust
Irrevocable trusts can be a powerful tool for estate planning, as assets placed in these trusts are removed from your taxable estate. Once assets are transferred into an irrevocable trust, the grantor no longer has control over them, but they are sheltered from estate taxes. Some common types of irrevocable trusts for minimizing estate taxes include:
- Grantor Retained Annuity Trusts (GRATs): GRATs allow you to transfer appreciating assets to heirs while freezing their value at the time of transfer, effectively minimizing future estate tax liability.
- Irrevocable Life Insurance Trusts (ILITs): An ILIT keeps life insurance proceeds out of your taxable estate by owning the life insurance policy. This strategy prevents estate taxes from applying to death benefits paid to beneficiaries.
3. Utilize Charitable Giving
Donating a portion of your estate to charity is another effective way to reduce estate taxes. Gifts to qualified charitable organizations are fully deductible from the estate, reducing the taxable value. You can establish charitable remainder trusts (CRTs), which allow you to provide for your heirs while eventually leaving assets to charity. This strategy provides a tax deduction, ensures a steady income stream to your beneficiaries, and supports philanthropic causes.
4. Take Advantage of Portability
Portability is a provision in federal estate tax law that allows the unused portion of a deceased spouse’s estate tax exemption to transfer to the surviving spouse. This can significantly increase the total exemption available to a couple’s combined estates. By effectively utilizing portability, couples can shelter nearly $26 million from estate taxes (based on 2024 exemptions). Ensuring proper documentation of the deceased spouse’s exemption is key to maximizing this benefit.
5. Discounted Asset Valuation via Family Limited Partnerships (FLPs)
Family Limited Partnerships (FLPs) allow family members to jointly own assets, with parents often holding the majority shares. By transferring minority shares of the partnership to heirs, the value of those shares can be discounted due to lack of control or marketability. This reduction in the asset’s value helps to minimize estate taxes while still transferring significant wealth to beneficiaries. However, careful structuring is needed to avoid IRS scrutiny.
Effective estate planning requires expert guidance to navigate complex tax regulations and strategies. At Kanzer Law, our estate planning specialists can help you implement these strategies to protect your wealth and ensure a smooth transfer of assets to your loved ones. Contact us today to schedule a consultation and secure your financial legacy for future generations!