Strategies Beyond Irrevocable Trusts to Protect Wealth from Estate Taxes

There are various legal means for avoiding or reducing estate taxes, but some work better for different types of assets and personal goals. Consulting a tax attorney who specializes in wills and estates is highly recommended for a comprehensive evaluation. While online posts cannot provide specific advice, it is always advisable to seek professional guidance to ensure the best outcomes for your estate.

Tax Exemptions and Strategies for High-Net-Worth Individuals

As of now, estates for couples can enjoy a combined exemption of more than $22 million in estate taxes until 2025. These exemptions could potentially decrease under the Biden administration, so it is important to stay informed. However, even with these exemptions, there are additional strategies to minimize taxable estates.

Using the Unlimited Lifetime Gift Tax Exemption

One method to reduce the value of a potentially taxable estate is to use the unlimited lifetime gift tax exemption. You can make gifts of up to $15,000 each year without needing to file gift tax returns. By doing this, you can significantly reduce the size of your estate while maintaining control over your assets.

For example, if a married couple each make $30,000 in gifts per year, they would reduce their estate value by $60,000 annually, far surpassing the current exemption of $22.8 million. Over the years, these gifts can accumulate and substantially impact the overall size of your estate.

Charitable Remainder Trusts (CRTs)

Another strategy to consider is the use of Charitable Remainder Trusts (CRTs). CRTs allow you to convert a highly appreciated asset, such as stock or real estate, into lifetime income, which reduces your income and estate taxes. You pay no capital gains tax when the asset is sold, and the trustee can reinvest the proceeds in income-producing assets.

How a CRT Works:

Transfer an appreciated asset into an irrevocable trust, which removes it from your estate so no estate taxes will be due upon your death. Receive an immediate charitable income tax deduction. The trustee sells the asset, which is paid at full market value, with no capital gains tax, and reinvests the proceeds in income-producing assets. For the rest of your life, the trust pays you an income. When you die, the remaining trust assets go to the charities chosen by you.

While CRTs are highly sophisticated and reserved for truly high-valued estates, they can be effective for those with substantial assets. Consult a tax attorney to determine if this strategy is right for you.

No One-Size-Fits-All Approach

Each person's situation is different, and there is no one-size-fits-all approach to sound estate planning. The best strategy to minimize estate taxes is often determined by a comprehensive review of your unique circumstances and goals.

The Bottom Line: While irrevocable trusts are a powerful tool for asset protection, there are other strategies available, such as using the lifetime gift tax exemption and charitable remainder trusts. Consulting a reputable estate planning attorney is essential to find the right approach for your situation.