Written by If estate taxes haven’t been on your radar for 2024, now is the time to start planning. At the same time, many individuals may not be concerned about estate taxes—often referred to as the “death tax”—those with taxable estates exceeding $13.61 million (for individuals) or $27.22 million (for couples) in 2024 should take note of potential tax liabilities.
It’s important to remember that the 2017 Tax Cuts and Jobs Act (TCJA), which significantly raised the estate tax exemption, is set to expire in 2025. When it does, the estate tax exemption could be reduced by nearly half, making more estates subject to taxation.
In addition, state-level estate and inheritance tax thresholds are often much lower than the federal exemption, so it’s crucial to stay informed about local regulations.
Keep reading to explore strategies recommended by our financial advisors in Tigard to help minimize estate taxes and protect your wealth for future generations.
Marital Transfers
Gifts made during your lifetime or left in a will are not subject to estate taxes if they are transferred to a surviving spouse. However, this exemption doesn’t apply if your spouse is not a U.S. citizen.
The marital transfer estate tax exemption allows the estate to defer tax payments owed to the IRS. While this postpones the tax bill, it does not eliminate the estate taxes altogether.
Once the second spouse passes away, the estate will be taxed on the full taxable amount, including assets transferred after the first spouse’s death.
Lifetime Gifts to Children and Grandchildren
A married couple can give tax-free gifts to as many individuals as they like each year, as long as the gift amounts stay within the federal gift exclusion limit.
In 2023, the limit is $17,000 per recipient. If both spouses give gifts, they can jointly give $34,000 to one person without incurring gift tax.
Over time, this can significantly reduce the couple’s taxable estate, potentially lowering both their federal and state estate tax liabilities.
Designate Beneficiaries
Start with the simplest option: naming a beneficiary. This is the easiest way to transfer assets. Most financial accounts, like 401(k)s and IRAs, allow you to designate one or more beneficiaries, often through your financial provider’s online platform. If your bank doesn’t offer this option online, contact them to learn how to set it up.
Without a named beneficiary, IRS rules typically require inherited retirement accounts to be distributed quickly, usually within five years, potentially resulting in higher taxes for heirs. Remember, the beneficiary you designate for these accounts overrides any instructions in your will.
Family Limited Partnership
A family limited partnership (FLP) allows families with business interests to plan their estates. It is a family-owned entity set up as either a limited partnership (LP) or a limited liability company (LLC).
Benefits of an FLP include:
- Reducing income taxes
- Preserving business ownership within the family
- Limiting liability for family members
There are two types of owners in an FLP: general and limited partners.
General Partners
General partners—often the parents or grandparents—create and manage the partnership. They contribute assets and then gift shares to family members. These shares can’t be sold outside the family, reducing their market value.
Tax rules allow a 15% to 30% discount on these shares, which can help reduce federal estate tax.
Limited Partners
Limited partners—typically children or grandchildren—cannot use the family partnership to settle debts and have no control unless permitted by the general partners. Partnership assets remain protected until distributed.
Although partners must pay income tax on their share of the income, any asset growth in the partnership is exempt from estate and inheritance taxes. When ready, general partners can transfer control to a family member or trustee.
Conclusion: Maximize Inheritance with Strategic Estate Tax Reduction
When it’s time to address estate taxes and planning, consider these strategies carefully. They can be highly beneficial and may prove to be the best options for preserving your wealth.
Consult a financial advisor in Portland, Oregon, through Lifelong Wealth Management for expert guidance. Visit the website today! The advisors are ready to help you with personalized estate planning solutions if you’re specifically looking for financial assistance.
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