Ways The Wealthy Can Avoid Estate Taxes

Ways The Wealthy Can Avoid Estate Taxes

21 Sep 2021

The fact that the wealthy attempt to avoid estate taxes is not a secret.  Everyone is looking for ways to reduce their tax burden, regardless of their socioeconomic level or political allegiance.  There is even an argument to be made that the wealthy’s successful minimization of estate taxes provides a utilitarian benefit.  Money that remains out of Uncle’ Sam’s grasp will partially trickle down throughout the economy, benefiting the greater good to a certain extent.

There is no shame in reducing your tax burden, especially when it comes to estate taxes.  Avoiding or at least minimizing estate taxes is that much easier with the assistance of an experienced CERTIFIED FINANCIAL PLANNER™ practitioner (CFP®).

A fee-only fiduciary CFP® professional provides fully personalized financial planning through a holistic approach that safeguards your family’s hard-earned assets.

Looking to Reduce Your Estate Taxes?  Consider Creating a Family Limited Partnership

If you are like most adults, you have at least one child, or are considering adding to your family.  Those who have family-owned assets, properties, or even a business are encouraged to meet with a financial professional to discuss the merits of establishing a family limited partnership.

This type of partnership ensures that the family business or other assets are provided to your children without paying an egregiously high tax after you die.

A CFP® professional can guide you through the necessary process to establish a general partnership.  The next step is to make your family members and other heirs limited partners. Your role as the general partner safeguards that you will continue to be in control of your assets while you are still alive.  The partners, regardless of whether they are your offspring or another loved one, will hold a percentage of ownership in the business or asset.

The creation of a family limited partnership ultimately reduces the size of your estate.  However, this approach is beneficial in that it helps you avoid excessive taxation.  A family limited partnership also provides an invaluable peace of mind in that you will rest easy knowing your assets will be seamlessly shifted to loved ones.

There is Nothing Wrong With Giving Gifts

There is a common misconception that it is illegal to use gift-giving as a means of avoiding high estate taxes.  The truth, is the wealthy really can avoid the estate tax by gifting money, stocks, and other assets to a family member.  These gifts can be provided to any individual tax-free as long as the value does not exceed $15,000.  If you are married and filing joint tax returns, the tax-free gift maximum value is $30,000.

All in all, the federal government permits the wealthy to bypass estate taxes through the gifting of a maximum of $11.7 million throughout a lifetime.  Gifting an amount greater than $11.7 million will trigger the gift tax.  Every homeowner, parent, and individual who owns assets should know that the law permits gift-giving to as many people as desired.  This means that you can continue to gift assets to family members all the way up until the point at which the net value of the estate gifted is $11.7 million.  When the gift tax and estate tax are triggered simultaneously, this benchmark is reached. A CERTIFIED FINANCIAL PLANNER™ practitioner (CFP®) can guide you on whether or not gifting as part of tax planning is right for you.

Make Charitable Donations

Making a charitable donation helps others, makes you feel good about yourself, and also reduces your tax burden. Another way to tax planning by creating a trust, where you can transfer some of your wealth to a charity with the use of a trust.  Charitable remainder trusts and charitable lead trusts are both available for this purpose.  Charitable lead trusts tie up the assets within the trust, ensuring they are directed to a charity that is tax-exempt.  Donating part of your wealth to charity ultimately reduces the value of your estate, providing a much-appreciated tax reduction. The remainder of the assets in the trust are then given to your selected beneficiaries at the time of your death, or at a point in time you select for the transition of wealth to occur.

By choosing a charitable remainder trust you can transfer stock or another asset that is appreciating directly to an irrevocable trust. This type of asset can help grow your money throughout the remainder of your life.  The investment income is then donated to your charity of choice at the time when you pass, for example. Such a strategic approach ensures you do not pay the capital gains tax and also reduces your estate tax burden. Since a charitable donation provides a tax deduction is all the more reason to take this approach.

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Create an Irrevocable Life Insurance Trust

The last thing you want is to put your loved ones in a financial bind when you pass away. Having life insurance is one way to prepare for this future event. The proceeds of a life insurance policy are not taxable; however, there is the potential for the proceeds to be included as a component of your overarching estate so taxation is within the realm of possibility.

Creating an irrevocable life insurance trust involves establishing a trust then transferring its ownership to another individual. The trust is irrevocable as adjustments cannot be made without the trust beneficiary’s consent. The transfer your life insurance and death benefits will not be considered a component of the estate.  Ideally, this transfer should be done as soon as possible because after three years after the date of death, the proceeds from the life insurance policy could be considered a component of the taxable estate.

Consider the Merits of a QPRT

A qualified personal residence trust, or QPRT for short, decreases the number of assets that the estate and therefore decreases a potential tax burden. A QPRT spurs the transfer of the home’s ownership to a trust.  However, there is no need to vacate the premises during the term of the trust or even pay rent.  The beneficiaries take over the property when the term ends, essentially freezing the home’s market value and sidestepping the arguably punitive gift tax.

The icing on the cake is the ensuing reduction in the size of the estate. The only potential downside to the QPRT strategy is if the owner of the trust passes away prior to the trust term’s completion. If a premature death were to occur, the home is still viewed as a component of the overarching estate.

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More About the Author: E. Michael McGervey, CFP®, CRPC®

Mike is passionate and skilled at helping clients solve complex financial challenges. He’s known for his thoughtful communication, educational approach, and exceptional customized service. Mike has been a sought-after source for financial television, magazines, and newspapers looking for insightful analysis. His expertise has been featured by CNBC, FOX Business and...