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Year-End Estate Planning and Tax Tips



It's hard to believe 2024 is only a few months away. Now is the time to do a little estate and tax planning if you’re hoping to preserve as much of your wealth and assets as possible for future generations.


One of the biggest challenges is finding ways to minimize your tax liability, as taxes can shrink the value of the estate you’re able to leave behind. Taking a proactive approach to estate tax planning can protect your financial legacy for the short and long term. The Law Office of Joseph M. Barton can help you create an estate plan to meet your needs.


How Taxes Affect Your Estate Plan


Taxes can take a significant bite out of your wealth, both at the federal and state levels. There are several different types of taxes that can come into play and affect the value of your estate that’s passed on to your heirs.


Estate tax


The federal estate tax is a tax that’s levied on the transfer of property when someone passes away. At the upper range, the federal estate tax can reach 40%. The tax you’re subject to is determined by the value of assets in the estate. A taxable estate includes all of the decedent’s property, minus any allowed costs, losses, exclusions or deductions.


Estate tax allows for an exemption, based on the estate’s value. The exemption limit is adjusted regularly to account for inflation and changes to the tax code. For 2023, the estate tax exemption limit is $12.92 million per individual, doubling to $25.84 million for married couples. The previous limit was $12.06 million in 2022.


No federal estate tax applies unless the value of your estate exceeds the prescribed limit. Whether you’re obligated to pay estate tax at the state level depends on where you live. States that assess estate tax can also set limits for exempt amounts, which determine when the tax applies.


Gift tax


The gift tax applies to financial gifts made from you to someone else. As the gift giver, you’re responsible for paying the gift tax. The IRS does, however, allow you to make gifts up to an annual exclusion limit before the gift tax applies.


For 2023, the gift tax annual exclusion limit is $17,000 per person. You could gift that amount from assets in your estate to any number of individuals, without triggering the gift tax. Married couples can double the gift tax exclusion limit to $34,000 if they agree to split gifts on their tax return.


Gifts are included in the lifetime estate tax exemption limit mentioned previously. It’s important to note that the current exemption limits apply only through 2026. If Congress takes no action to extend the higher limits imposed by the 2017 Tax Cuts and Jobs Act, then it’s been speculated that the exemption limit could be cut roughly in half.


Inheritance tax


An inheritance tax is a state tax that’s levied on the assets of a deceased person. California does not have an inheritance tax but if you live in a state that does (or plan to move to one that does), it’s important to understand what that might mean for your estate plan.


With estate tax, the tax is paid out of your assets when you die, with the remaining assets distributed to your beneficiaries. Inheritance tax, on the other hand, is levied against the person or persons that inherit assets from your estate. The amount of the tax is usually determined by the value or amount of assets received.


Similar to estate tax, states can set thresholds that determine when the inheritance tax applies. For example, your heirs might need to inherit $1 million in assets from you before this tax kicks in. States may automatically exempt spouses, children or other heirs who inherit from the deceased person.


Generation-skipping tax


Generation-skipping tax is another federal tax payment that may apply if you “skip” a generation in your estate plan. For example, say that instead of passing on assets from your estate to your adult children, you leave it to their children instead. The generation-skipping tax could apply and if so, you’d be subject to the highest applicable federal estate tax rate.


Establishing a generation-skipping trust is one way to get around that. This type of trust allows you to pass down assets to future generations while minimizing estate tax liability.


Estate Tax Planning Strategies


The more planning you do now, the more you might be able to offset your estate tax liability or reduce inheritance taxes for your heirs. Talking to your financial advisor is a good place to start with estate tax planning, as they can review your individual situation to find appropriate solutions. Here are some of the things you might be able to do to ease the burden of estate taxes.


Gift assets to heirs during your lifetime


As mentioned, you can gift money or other assets directly to individuals up to certain limits without triggering the gift tax. You can reduce your total taxable estate by giving away some of your assets while you’re still living. Gifting assets is something you can do each year because the annual exclusion limit resets.


Make charitable donations


You can also remove assets from your taxable estate by gifting them to charitable organizations. For example, if you’d like to support future students at your alma mater you might set aside some of your estate assets to create an endowment fund. Those assets can be used to fund scholarships or provide financial support to school programs.


As an added benefit, making contributions to eligible nonprofits can result in a tax deduction in the year you make them. Generally, you can deduct charitable contributions up to 50% of your adjusted gross income but you will need to itemize deductions on your tax return.


Bottom Line


Estate tax planning might seem daunting but it’s not something you can afford to overlook. Even if you think your estate is too small to be affected by any of the taxes mentioned here, it’s still important to consider what you can do to protect as much of your wealth as possible.


Visit www.joebartonlaw.com to learn more and schedule a consultation today.


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