One of my key roles as a wealth advisor is to help our private clients design an estate plan that not only ensures their assets are distributed according to their wishes, but also minimizes estate taxes and protects those assets from creditors. In this article, we’ll explore some of the strategies and solutions that you can use to achieve these objectives.
Understand Estate Tax Laws
The first step in designing an estate plan that mitigates estate taxes is to understand the laws that govern estate taxation. In the United States, the federal government imposes an estate tax on estates valued at more than $12.92 million for individuals and $25.84 million for married couples (as of this writing in 2023). This law is scheduled to sunset in 2026 to the pre-2018 level of $5 million (adjusted for inflation more like $6.8MM), when the Tax Cuts and Jobs Act expires. However, some states also have their own estate tax laws, which may have lower thresholds.
If you are exposed to estate taxes, there are numerous strategies that can help you mitigate your tax exposure and ensure a more meaningful legacy. You may consider gifting assets to your beneficiaries during your lifetime, establishing a trust(s), or setting up a family limited partnership. Additionally, if you are philanthropic, there are a number of charitable solutions available.
Establish a Trust
One of the most common estate planning strategies is the use of trusts.
What is trust and how do they work? A trust is a legal entity that holds assets (stocks, bonds, real estate, private companies etc.) for the benefit of designated beneficiaries. By transferring assets to a trust, you can reduce the value of your estates and potentially avoid estate taxes and still ensure your assets benefit your heirs.
In addition to reducing estate taxes, trusts can also provide protection from creditors. Assets held in a trust are generally shielded from creditors, which means that if you are sued or face financial difficulties, your assets may be protected. Additionally, the beneficiaries of your trust would also enjoy creditor protection from lawsuits, divorces etc.
Set Up a Family Limited Partnership
Another strategy that financial advisors may recommend is the establishment of a family limited partnership (FLP). An FLP is a legal entity that is created to hold family assets, such as real estate, investments, and business interests. By transferring assets to an FLP, you can reduce the value of your estate and potentially minimize estate taxes.
In addition to estate tax planning, an FLP can also provide protection from creditors. Because the assets are owned by the partnership rather than the individual partners, they may be shielded from creditors’ claims.
Consider Life Insurance
Another strategy that financial advisors may recommend is the use of life insurance. By purchasing life insurance, you can provide your beneficiaries with a source of tax-free income that can be used to pay estate taxes or other expenses. Additionally, life insurance proceeds are generally protected from creditors, which means that they may be shielded from claims. Important note, life insurance death benefit amounts are included in your taxable estate. Depending upon the size of your estate, you may need to own the life insurance in a specific trust knows as an ILIT.
Carefully Design Your Estate Plan
Designing an estate plan that minimizes estate taxes and protects your assets from creditors requires careful planning and consideration. All our wealth advisors:
- Understand the estate tax laws
- Work with trust and estate attorneys to ensure the use of trusts and family limited partnerships
- Consider the use of life insurance that are aligned with your personal goals and objective.
By collaborating with professional advisors, you can pursue your estate planning goals and gain peace of mind for yourself and your loved ones.
This piece is not intended to provide specific legal, tax, or other professional advice. For a comprehensive review of your personal situation, always consult with a tax or legal advisor.