Many people do not fully understand the importance of having an estate plan. These end-of-life legal documents collect a person’s property and assets, life insurance information, retirement plans, investment portfolios, and their will. A comprehensive estate plan helps the executor work with the probate courts to distribute assets to heirs and pay outstanding debts. Comprehensive estate plans will also account for one last inevitable cost — estate taxes.
Commonly referred to as “death taxes,” the federal government collects one final tax after death. These taxes can be costly, so many lawyers help people draft estate plans that use tax breaks and trusts to preserve these assets and the family’s inheritance.
Common methods to minimize death taxes
People can use the following tactics to prevent taxes from decimating a family’s estate:
- Marital transfer: Lifetime gifts are not subject to estate taxes. Gifting parts of an estate to a spouse can avoid taxes upon death, but this is only a deferment. Since the gifts enter the spouse’s estate, they will have to pay estate taxes upon their death.
- Gifts to children or grandchildren: Every year, individuals can gift up to $12,000 to any number of people, tax free. Gifts can substantially reduce the taxes owed upon death while supporting the family.
- Trusts: People can tuck money or assets away into trusts to avoid estate taxes. A lawyer familiar with estate planning can examine one’s finances to identify the best trusts suitable for the size of one’s estate and the number of heirs.
- Private annuity: Individuals can sell an asset to a younger generation in exchange for an unsecured promise of annual payments for the rest of the seller’s life.
- Special use real estate valuation: For taxation purposes, the federal government evaluates property at its highest value, often producing unfair tax expectations. This rule ensures regulators value property at its “actual” rather than its “highest and best” use.
- Charitable transfers: Many people can reduce the value of their estate by gifting chunks of it to charity. Charitable donations may also allow for tax deductions, preserving more of an estate. Some gifts allow the donor to retain use of the asset until their death.
Draft an estate plan with legal guidance
It is never too late to put together an estate plan. These legal documents help a family preserve what they have built for following generations. Those interested in drafting a comprehensive plan can reach out to a local attorney familiar with estate law today.