When it comes to estate planning, there’s no shortage of available techniques and strategies. If applicable, the two specific strategies discussed here should be used to reduce your taxable estate and ensure your wishes are carried out after your death. Keep reading to learn more about these essential estate planning strategies.
Take Advantage of the Annual Gift Tax Exclusion
Don’t underestimate the tax-saving power of making annual exclusion gifts. For 2023, the exclusion increased by $1,000 to $17,000 per recipient ($34,000 if you split gifts with your spouse).
For example, let’s say Jim and Joan combine their $17,000 annual exclusions for 2023 so that their three children and their children’s spouses, along with their six grandchildren, each receives $34,000. The result is that $408,000 is removed tax-free from the couple’s estates this year ($34,000 x 12).
What if the same amounts were transferred to the recipients upon Jim’s or Joan’s deaths instead? Their estate would be taxed on the excess over the current federal gift and estate tax exemption ($12.92 million in 2023). If no gift and estate tax exemption or generation skipping transfer tax exemption was available, the tax hit would be at the current 40 percent rate. So, making annual exclusion gifts could potentially save the family a significant amount in taxes.
Use an Irrevocable Life Insurance Trust to Hold Life Insurance
If you own an insurance policy on your life, be aware that a substantial portion of the proceeds could be lost to estate tax if your estate is over a certain size. The exact amount will depend on the gift and estate tax exemption amount available at your death as well as the applicable estate tax rate.
However, if you don’t own the policy, the proceeds won’t be included in your taxable estate. An effective strategy for keeping life insurance out of your estate is to set up an irrevocable life insurance trust (ILIT).
An ILIT owns one or more policies on your life, and it manages and distributes policy proceeds according to your wishes. You aren’t allowed to retain any powers over the policy, such as the right to change the beneficiary. The trust can be designed so that it can make a loan to your estate for liquidity needs, such as paying estate tax.
Are These the Right Strategies for You?
Bear in mind that these two essential estate planning strategies might not fit your specific estate plan. We can provide you with additional details on each and help you determine if they’re right for you. Contact the estate planning professionals at Ramsay & Associates with questions.
