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How to Minimize Estate Taxes and Maximize Your Legacy

Take a hard look at your estate plan. Does it show considerable tax exposure? Given the substantial increase in estate tax exemptions—rising to nearly $26 million for married couples1 in 2023—there are ample opportunities to avoid heavy taxes in today’s environment. In fact, in recent years only 0.2% of estates2 have been subject to taxation at all. With the right techniques, you can often keep more of your hard-earned wealth in the family and make a lasting impact on the causes you care about.

 

Highlighting a disparity in tax readiness, a study found 91% of wealthy investors3 cite tax efficiency as an important part of their estate plan, yet 37% don’t have (or don’t know if they have) tax-efficient strategies in place. Without full knowledge of the structures to reduce your taxable estate, the 18% to 40% federal estate tax4 can erode your legacy.

 

We often assist clients with minimizing estate taxes by using a combination of thoughtful gifting, creation of trust structures and philanthropy. Through an in-depth consultation, we help ensure your estate plan reflects your wishes for your legacy, with a tax-efficient and well-crafted transfer of wealth to the next generation.

 

Here, we offer a snapshot of how strategic planning can mitigate your estate taxes and potentially reduce them to zero.

Use It or Lose It: Maximizing Today’s Estate Tax Exemptions

Personal tax rates are probably going in one direction: Up.

The generous estate tax breaks available today create an opportune moment for wealth transfer and tax reduction.

The 2017 Tax Cuts and Jobs Act (TCJA) doubled the federal lifetime estate tax exemption, which means individuals can pass on an inflation-adjusted $12.92 million ($25.84 million for married couples) without paying estate taxes in 2023. However, the higher exemption is likely temporary. When key TCJA provisions expire at the end of 2025, it’s expected that the exemption will drop to between $6.5 million and $7.25 million per person.

 

Luckily, the anti-clawback rule5 ensures gifts made during high-exemption years aren’t retrospectively taxed when exemptions lower. So now really is a great time to take strategic advantage of this wealth transfer opportunity.

 

When you give gifts while you’re alive, you can also use the annual gift tax exclusion. This allows you to give a certain amount of money ($17,000 per person in 20236) to as many people as you want each year without it counting against your lifetime gift and estate tax exemption. It helps gradually reduce your taxable estate. Plus, any future appreciation on these gifts also comes out of your estate.

Responsible Gifting Strategies

While early gifting can reduce your taxes, the strategy also raises valid concerns about transferring substantial wealth to younger generations prematurely. We help our clients find the right balance of flexibility, control and asset protection through the use of trusts and careful document review.

Use of Trusts

You can use trusts to maximize your gifting during the increased exemption period while addressing tax, timing and confidentiality considerations.

 

Revocable vs. irrevocable trusts

Estate planning often involves using two fundamental, broad categories of trusts, each with distinct characteristics and uses.

 

Revocable (or “living”) trusts allow you to keep control over your assets. You’re free to modify or dissolve the trust whenever you desire during your lifetime. The primary purpose of a revocable trust is to avoid probate. You can structure the trust to take full advantage of you and your spouse’s estate tax exemptions upon your death.

 

Irrevocable trusts offer less flexibility. Once they’re set up, you typically can’t make further modifications. This rigidity may seem disadvantageous, but there’s a silver lining: After establishing an irrevocable trust and transferring assets into it, those assets leave your taxable estate. The trust provides a shield, protecting those assets from legal disputes and creditors. Irrevocable trusts are commonly used for large lifetime gifts.

 

Credit shelter trusts (CSTs)
CSTs reduce estate taxes by protecting the money left by the first spouse to pass away. When one spouse dies, part of their money (up to a certain amount allowed by tax laws) goes into this trust. The rest can go to the surviving spouse, tax-free. The money in the CST isn’t taxed, even when the second spouse dies, which means more money stays with the family.

 

Marital trusts
Often used with a CST, a marital trust provides income to a surviving spouse while preserving the principal for heirs. This type of trust helps to ensure that the assets of the first spouse to die eventually go to specified beneficiaries (like children from a prior marriage) after the death of the surviving spouse. Assets in a marital trust are subject to estate taxation at the death of the surviving spouse.

 

Spousal lifetime access trusts (SLATs)
SLATs allow you to move assets out of your estate into a trust, which benefits your spouse throughout their lifetime. While you reduce your taxable estate, your spouse can still access the assets if needed. This strategic move can shelter assets from estate taxes while maintaining some family access to wealth.

 

Generation-skipping trusts (GSTs)
GSTs allow you to pass assets down to your grandchildren or subsequent generations, often avoiding the estate taxes that would apply if you transferred the assets to your children first. It’s a way to help safeguard your assets for future generations.

Examine Formula Clauses for AB Plans

As you review your estate plan for tax efficiency, evaluate any formula clauses included in existing documents. If you have a typical AB estate plan that involves both a marital trust and a CST, you can generally direct assets into the CST up to the largest amount allowable without triggering estate taxes.


With current exemption levels at a heightened $12.92 million, often this means that all assets end up in the CST to minimize taxes. However, this setup can create conflict among family members. Though a surviving spouse might be the primary beneficiary for both the marital trust and the CST, the latter rarely requires distributions of income and might also have other beneficiaries, like children.


In addition, it’s possible for children to be beneficiaries of a CST while the surviving spouse is still alive, potentially creating additional tension. With federal exemption limits raised and expected to change after 2025, it’s crucial to revisit and update these clauses regularly.

Drawbacks To Consider

While it’s important to take full advantage of today’s estate tax exemptions, you need to balance this approach with retaining appreciated assets like stocks and property until death. 

This ensures a stepped-up income tax basis for assets that have grown in value since you purchased them, limiting the future tax burden on your heirs. Gifting such assets now can raise taxes for your heirs when they later sell them.

Don’t Overgive

The federal estate tax exemption ceiling may be at a historic high, but there’s still a cap. Exceeding exemption limits on gifts could invite unexpected tax implications. Specifically, if your gifts throughout your lifetime surpass the federal exemption limit, those excess amounts could be subject to hefty estate taxes up to 40%, depending on the overage. Review the estate tax schedule7 for 2023 below. But keep in mind that lower rates, such as 18%, are typically offset by credits. Generally, estate taxes are a flat 40% on amounts over the exemption.

Federal Gift Taxes (2023)
Taxable Amount Exceeding Annual Exclusion Limit Gift Tax Rate (%)
$0–$10,000 18
$10,001–$20,000 20
$20,001–$40,000 22
$40,001–$60,000 24
$60,001–$80,000 26
$80,001–$100,000 28
$100,001–$150,000 30
$150,001–$250,000 32
$250,001–$500,000 34
$500,001–$750,000 37
$750,001–$1,000,000 39
$1,000,000+ 40

Incorporate Charitable Giving Into Your Estate Plan

We often see clients overlook charitable giving in their estate plans because they’re focused on immediate family inheritance and wealth protection. But charitable contributions can provide significant legacy-building opportunities. And the sooner you determine how much you want to give to charity and how much you want to give to your children, the easier it is to take advantage of the substantial tax-reduction benefits available to you.

 

For example, let’s say you and your spouse have already given a total of $10 million to your two children, and your estate plan will give your children another $10 million each when you pass away (bringing you to $30 million in gifts). Assuming that there aren’t any additional deductions to apply, you’re now $4.1 million over your lifetime gifting limit for 2023. That amount will be subject to a 40% tax. You’re now paying over $1.5 million to give your kids money.

To assess whether this is really the best approach for your unique situation, we would ask you the following questions as part of your estate planning process:

  1. How much do you want to give to your kids?
  2. How can we proactively plan your philanthropy today to reduce your taxable estate?

It’s important to note that the TCJA bumped up the adjusted gross income (AGI) limit for cash gifts to public charities from 50% to 60%,8 presenting a short time frame for more tax-efficient giving. When this TCJA provision sunsets at the end of 2025, the limit will revert to 50% unless Congress acts to extend the higher percentage.

 

Two trust-oriented tools worth considering for charitable giving are the charitable remainder annuity trust (CRAT) and charitable lead annuity trust (CLAT).

 

Charitable remainder annuity trusts (CRATs)
A CRAT is a type of trust that gives you a fixed income every year for a certain period or your lifetime. After that period or your death, a charity gets the money left in the trust. When you set up the trust, you get a tax break for your charitable donation.

 

Charitable lead annuity trusts (CLATs)
A CLAT does the opposite. A charity gets a fixed amount of money every year for a set time. Then, either you get the remaining money back or it goes to someone you choose, like a family member. This approach is a way to give to charity and also keep wealth in your family, with some tax benefits.

 

Why CRATs are better in a high-interest-rate environment
When interest rates are high like they are today, a CRAT is often preferable to a CLAT. Because you lock in a fixed income when you set up the CRAT, higher interest rates can mean you secure a larger yearly payment for yourself. In addition, your tax deduction on a CRAT is based on the present value of the future gift to the charity, considering the amount that’s likely to remain after all annuity payments are made.

 

When interest rates are high, the assumed future value of the charitable gift (what the charity will eventually receive) is lower because of the higher discount rate applied in the calculation. As a result, your initial asset contribution is higher relative to that future value, resulting in a larger immediate tax deduction for you.

Think of the current estate tax breaks as a limited-time offer.

Advanced Planning & Transfer Techniques

Large estates call for thoughtful planning to minimize taxes and preserve wealth for the next generation. Here are some additional advanced strategies to consider.

 

Analyze an asset’s growth potential
Deciding whether to keep or transfer high-value assets, such as real estate or stocks, demands careful consideration. The expected future growth of these assets is one major factor to account for. For instance, if you expect an owned stock will skyrocket in value, gifting it to a beneficiary now could help you avoid capital gains taxes.

 

Intra-family sales
Intra-family sales involve transferring assets to family members, typically at a reduced value, in exchange for a promissory note. This strategy can work when transferring valuable assets like real estate or a family business. By selling these assets to family members at less than market value, you can shift the appreciation out of your taxable estate. Though any amount below fair market value may be considered a gift, getting the future growth outside the taxable estate can be an attractive strategy. If estate tax rates increase in the future, the transferred assets will not be subject to the higher tax rates.

 

Sales to defective grantor trusts (DGTs)
With sales to DGTs, you transfer assets to an irrevocable trust where the grantor, typically the person transferring assets, pays taxes on the trust’s income. This strategy removes assets from the grantor’s taxable estate while allowing them to keep control over the trust’s income. Any appreciation of these assets is excluded from the taxable estate. Additionally, the grantor’s payment of the trust’s income taxes further reduces the estate’s overall value.

 

Family limited partnerships (FLPs)
FLPs enable the centralized management of family assets, potentially offering certain asset protections and possibly reducing estate taxes through valuation discounts. This allows you to transfer wealth to younger generations while you keep control over the assets, deciding what (if any) distributions are made.

 

Qualified personal residence trusts (QPRTs)
A QPRT allows you to transfer your primary residence or vacation home into a trust, while you retain the right to live in it for a specified period. After this term, the property transfers to the beneficiaries. You’re gifting the property at a discounted value, which can reduce estate taxes, and you’re freezing its assessed value for tax purposes.

A Tax-Free Estate Plan May Be Within Reach

You’ve achieved a level of wealth that’s not just about numbers in a bank account. It’s about what your money can accomplish and how you can use it to make a meaningful impact on your family—and the world—for generations to come. However, many estate plans fail to incorporate the full breadth of wealth transfer and charitable giving strategies, resulting in unnecessary taxes and a legacy that doesn’t live up to your standards. Our advisors can change that. We can help you gift assets during your lifetime, set up trusts to protect and distribute assets efficiently, and navigate complex tax laws to maximize exemptions. If you expect your estate plan will generate a large tax bill, we urge you to conduct a comprehensive reassessment as soon as possible. Call us, talk to an advisor and get started today.

 

The current tax code has an expiration date, and the sunset is approaching faster than a filibuster in a contentious Senate debate.

Sources:

1 Internal Revenue Service. Estate tax.
2 Iacurci, G. (2021, September 29). Here’s how many people pay the estate tax. CNBC.
3 O’Connor, B. (2023, September 25). Wealthy Americans need estate planning, but are they?  Yahoo.com.
4 Internal Revenue Service. (2023, September). Instructions for Form 706.
5 Internal Revenue Service. (2019, November 22). Final regulations confirm: Making large gifts now won’t harm estates after 2025.
6 Internal Revenue Service. Frequently asked questions on gift taxes.
7 Tax Policy Center. (2023, March 23). Estate tax rate schedule.
8 Internal Revenue Service. Publication 526 (2022), Charitable Contributions.

 

Disclosures:

 

For informational purposes only. Our statements and opinions are subject to change without notice. Data and statistics that may be contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

 

Tax and legal information contained herein is general in nature and should not be construed as legal or tax advice. Always consult a licensed attorney or tax professional regarding your specific legal or tax situation. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with our wholly owned subsidiary, RWA Tax Solutions, LLC. Legal services can be obtained through a separate, written engagement via our relationship with Hall & Diana LLC.