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5 Estate Tax Mitigation Techniques You Should Consider

The Tax Cuts and Jobs Act

In 2017, The Tax Cuts and Jobs Act doubled the amount that someone could pass to their heirs without incurring Federal estate tax. As a result, many families have enjoyed relief from the federal estate tax. In 2023, an individual can pass just under $13 million ($26 million for a couple) to their heirs without getting hit by the 40% federal estate tax.

There is an important caveat note, however. When the bill passed there were not enough votes to make it permanent, so it is scheduled to revert to the old amount (roughly 50% lower) effective 1/1/2026. This will greatly increase the number of families who could once again be subject to estate taxes at their deaths.

For those effected, there are a number of simple, low-cost options available to reduce and sometimes even eliminate estate tax. We have outlined five strategies for you.

1. Annual Family Gifting as a Shield

In 2023, an individual is able to gift up to $17,000 (or $34,000 per couple) to as many other individuals as they choose. For example, if a couple has two married children, and four grandchildren, they could each gift $17,000 to each of their children, children’s spouses, and grandchildren, for a total gift of $272,000 per year. Once the gift has been completed, the assets are outside of the couple’s estate and so they have shielded themselves not only from paying estate tax on that $272,000, but also any growth. In addition, this gift can be completed annually, exponentially increasing the estate tax savings.


2. Lump-sum Family Gifting for Growth

Similarly, individuals could choose to make a larger gift to family or friends, using up a portion of their lifetime gifting exclusion. While gifts above $17k generally require one to file a gift tax return, there is normally no immediate tax due with this return. It simply reduces the lifetime tax-free gifting amount (currently just shy of $13 million) available to clients in future years. Gifting appreciating assets to the next generation allows those assets to grow outside of the individual’s taxable estate, saving them estate taxes down the road.


3. Family Loans for a Leg Up

Money can be loaned to family members without creating a “taxable gift” as long as they charge a “reasonable” interest rate. The IRS publishes tables each month outlining what “reasonable” is, based on prevailing interest rates. This is normally at a significant discount to what is available for commercial loans. From an estate tax mitigation perspective, a client could loan their child(ren) money, and the child(ren) could then invest the money in the market. Any growth of those invested funds would be outside the parent’s estate. Note that the lenders (parents) would have to pay income tax on interest payments from the loan, somewhat eroding the value over time.


4. Charitable Giving for a Generous Legacy

Charitable gifts are excluded from estate tax. For individuals who are already charitably motivated, a dollar gifted to charity will work 40% harder than a dollar that goes through estate tax. Additionally, the funds can be gifted into a Donor Advised Fund or Private Foundation, allowing heirs to direct the gifts for years, decades, or longer after the client has passed away.


5. Life Insurance as a Reimbursement

There is a way to purchase or transfer life insurance where the death benefit exists outside of the taxable estate. This strategy is commonly utilized to “reimburse” the estate for any estate taxes expected to be paid. Each year, the payment of premiums is seen as a “taxable gift” subject to the $17,000 per person limit discussed previously. However, when the individual passes, the entire death benefit avoids both income taxes and estate taxes. This strategy involves setting up an irrevocable trust which owns the life insurance policy. An outside trustee (often a corporate trustee) maintains the trust each year, ensuring life insurance premiums are paid on time and any required paperwork/documentation is completed. This strategy is most valuable in situations where there is an expected estate tax, but assets are generally illiquid, requiring alternate sources of cash. Careful evaluation of benefits should be done before deploying this strategy because it does have higher setup and annual costs than the other strategies due to the requirement of hiring an estate attorney to create the trust and (normally) a corporate trustee overseeing the trust.

Don’t go it alone.  These are complex strategies that require careful monitoring so lean on your financial advisor and tax professional to fully evaluate your financial situation.  SYM Financial Advisors can help identify and maintain the tax mitigation techniques that best benefit your specific tax equation.  Contact us to start the conversation.

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