Navigating the intricate world of estate and trust taxation can be daunting. With regulations moving forward all the time, securing your assets for future generations can feel like crossing a minefield.
All it takes is understanding the basics and implementing some tax-efficient strategies to ensure you’re minimizing your tax liability and defining your legacy for your loved ones.
We’ve got some explainers on how trusts and estates can be taxed, and how you can reduce the overall tax burden to preserve your hard-earned wealth.
Keep reading.
How estates and trusts are taxed
To understand how to get the most out of estate planning, you need to understand the tax rates for estates and trusts. Here’s the lowdown on estate and trust taxes.
Estates
Some estates are subject to federal and state estate taxes when someone who’s passed away’s assets transfer to their spouse or heirs. Most estates have tax-free exemptions as estate tax levies on estates worth more than $12.92 million, or $25.84 million for married couples.
For estates that hit this threshold, the federal tax rates can hit up to 40% depending on deductions and estate planning measures. Some states will have an additional tax rate, so check your local laws to determine whether this is true. If you are in New York, get in touch with our personal tax accountant in NYC for assistance.
Trusts
There are two main categories of trusts in the US: grantor and non-grantor. With a grantor trust, the creator (or the grantor) is treated as the owner for tax purposes. That person is then responsible for reporting the trust’s incomings and outgoings on their own personal tax return.
With a non-grantor trust, the owner doesn’t keep control over the trust’s assets and the trust files its own tax return as it’s a separate legal entity. The trust may need to pay income tax on its income, as would any beneficiaries on any income they get from it.
Trusts can be tax-efficient to reduce estate tax by transferring assets into them, reducing the overall tax liability. It’s always best to consult a professional on these matters to ensure you’re on the right path.
Steps to minimize your tax liability
Gift tax exclusions
You can give a certain amount of money tax-free to loved ones, also known as gifting. Each married couple member has their own allowance, potentially doubling your tax-free gifting threshold.
It’s important to monitor the limits, as they change often. For 2022, the exemption limit was $16,000 per person, so $32,000 for a couple. This tax-free way of intergenerational wealth transfer can significantly save on tax in the long run.
Use spousal deduction
If you’re married you can leave an unlimited amount of assets to your spouse free of tax, which can be used as an estate planning method. The exception is if the spouse isn’t a US citizen.
Married couples can also take advantage of portability, where the surviving spouse can use the deceased’s remaining unused estate tax exemption. This can further reduce the overall tax burden, but it’s always worth consulting an expert on the logistics first.
Family offices
A family limited partnership (FLP) could be a useful estate planning tool if your family has multiple business interests. Several benefits include potential discounted asset valuation, control over asset management and indirect income tax advantages.
The IRS looks closely at family limited partnerships to ensure they’re not a tool for tax avoidance, so it’s especially important to keep all records up to date and potentially hire an expert, such as our CPA in NYC, to ensure everything for the FLP is compliant.
Generation-skipping transfer tax (GSTT) planning
If you want to leave some of your estate to your children, you may be subject to GSTT which can be up to 40%. The exemption threshold is currently $12.92 million per person (double for married couples).
Trusts can help minimize GSTT liability by allocating assets to beneficiaries tax-efficiently. An irrevocable trust structure like a dynasty trust could be used as it shields the assets from GSTT, allowing you to pass on wealth to grandchildren without the hefty tax penalties.
Donate to charity
Many people donate to charities as part of their estate planning strategy to define their legacy and reduce their overall tax liability. This is because charitable bequests made in a will are exempt from federal taxes, reducing the value of the overall estate and therefore the amount of tax paid on it.
There are several ways of going about this, such as a one-off outright gift, charitable trusts or setting up a private foundation that can bring income tax deductions into the mix. Working with a professional to help you with the numerous charitable giving options would be tailored to your unique needs.
Consult an expert
Every estate is different and making the most of tax-saving benefits can be a tricky maze to navigate. To ensure your estate plan is tailored to your specific needs and compliant with all applicable laws, speaking with an individual tax professional is essential.
An expert can help you design an estate planning strategy based on your assets, update the plan should anything change and guide you through the system’s complexities.
Review your plan regularly
Regular reviews of your estate planning are vital for two reasons: estate tax laws can change often, and your financial situation may also change in the future. Should your wealth grow, your estate planning needs will also become increasingly complicated.
Reviewing your plan annually and making necessary updates ensures it’s always current and optimized to minimize the tax burden.
Wrapping up
By taking a proactive approach to estate and trust tax planning, you can minimize your tax liability and create a lasting legacy that reflects your values and supports the people and causes you care about most. In New York, you can count on our team involved in NYC tax planning to take care of these matters.
With the right guidance and a full estate planning strategy, you can get peace of mind knowing your assets will pass on to your loved ones. Ahad & Co can be your partner in ensuring your assets are protected – our tax preparer in NYC provides expert advice on all sizes of estates. Get in touch today to find out more.
