The following estate planning strategies can be essential in certain situations. Let's discuss each strategy and their potential benefits:
Annual Gift Tax Exclusion: Taking advantage of the annual gift tax exclusion allows you to transfer assets to your loved ones during your lifetime without incurring gift tax or reducing your lifetime gift and estate tax exemption. By gifting assets up to the annual exclusion amount, you can remove those assets from your taxable estate. For 2023, the exclusion is $17,000 per recipient ($34,000 if you split gifts with your spouse).
For example, Jim and Joan elect to split their gifts and give their three children, their children’s spouses, along with their six grandchildren each $34,000. Jim and Joan are utilizing their annual exclusions effectively by gifting $34,000 to each recipient, resulting in a tax-free removal of $408,000 from their estates ($34,000 x 12). If they were to transfer the same amounts upon death, their estates would potentially face estate taxes. Making annual exclusion gifts can be a tax-efficient way to pass wealth to future generations while minimizing estate tax liabilities.
Irrevocable Life Insurance Trust (ILIT): An ILIT is a trust specifically designed to own and manage life insurance policies. By transferring ownership of the policy to the ILIT, the proceeds are kept outside of your taxable estate. If your estate is large enough to be subject to estate taxes, this strategy can help reduce the potential tax burden on your beneficiaries.
The ILIT must be irrevocable, meaning you cannot make changes to the trust once it is established. You also relinquish control over the policy, including the ability to change beneficiaries. However, the trust can provide liquidity to your estate by making a loan to cover estate tax obligations.
It's important to note that these strategies may not be suitable for everyone. The appropriateness of each strategy depends on individual circumstances, such as the size of your estate, your specific goals, and the applicable tax laws. Consulting with an experienced estate planning attorney or financial advisor is recommended to assess your unique situation and determine which strategies align with your objectives.
Please keep in mind that estate planning laws can change over time, so it's crucial to stay informed about the most up-to-date regulations and consult with professionals who specialize in estate planning to ensure your plan remains current and effective.
HoganTaylor estate planning professionals leverage their tax and business advisory expertise to help individuals accomplish goals and minimize tax burden. If you have any questions about the content of this publication, or if you would like more information about HoganTaylor's Estate Planning services, please contact Dan Bomhoff, Estate Planning Lead.
INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.