Asset Protection Trusts can address Long Term Care

April 5, 2023

Asset protection trusts can address long term care costs. As the number of people aged 65 plus continues to increase, more seniors realize they must address the cost of long-term health care, which can quickly devour assets intended for retirement or inheritances. Those who can prepare in advance do well to consider asset protection trusts, says the article “Asset protection is major concern of aging population” from The News Enterprise.

Asset protection trusts are irrevocable trusts in which another person manages the trust property and the person who created the trust—the grantor—is not entitled to the principal within the trust. There are several different types of irrevocable trusts used to protect assets. Still, one of the more frequently used irrevocable trusts for the purpose of protecting the grantor’s assets is the Intentionally Defective Grantor Trust, called IDGT for short.

As a side note, Revocable Living Trusts are completely different from Irrevocable Trusts and do not provide asset protection to grantors. Grantors placing their property into Revocable Living Trusts maintain the full right to control the property and use it for their own benefit, meaning any assets in the trust are not protected during the grantor’s lifetime.

IDGTs are irrevocable, and grantors have no right to principal and may not serve as a trustee, further limiting the grantors’ access to the property in the trust. Grantors may, however, receive any income from trust-owned property, such as rental properties or investment accounts.

During the grantor’s lifetime, any trust income is taxed at the grantor’s tax bracket rather than at the much higher trust tax bracket. Upon the grantor’s death, beneficiaries receive appreciated property at a stepped-up tax basis, avoiding a hefty capital gains tax.

While the term “irrevocable” makes some people nervous, most IDGTs have built-in flexibility and protections for grantors. One provision commonly included is a Testamentary Power of Appointment, which allows the grantor to change beneficiary designations.

IDGTs also include clauses providing for the grantors’ exclusive right to reside in the primary residence. However, if the grantor needs to change residences, the trustee may buy and sell property within the trust as needed.

IDGTs provide for two different types of beneficiaries: lifetime and after-death beneficiaries. Lifetime beneficiaries are those who will receive shares of the total estate upon the death of the grantor. Lifetime beneficiary provisions are important because they allow the grantor to make gifts from the trust principal. Hence, there is always at least one person who can receive the trust principal if need be.

Asset protection trusts are complicated and require the help of an experienced estate planning attorney. However, when used properly, asset protection trusts can address unanticipated creditors, long-term care costs and even unintended tax liabilities. If you would like to learn more about asset protection, please visit our previous posts.

Reference: The News Enterprise (March 4, 2023) “Asset protection is major concern of aging population”

Photo by Karolina Grabowska

Qualified Disability Trust can reduce Tax Burden

April 4, 2023

A qualified disability trust can help reduce the tax burden associated with special needs trusts. A qualified disability trust, or QDisT, qualifies for tax exemptions and applies to most trusts created for an individual with special needs. In most cases, explains a recent article from Investopedia, “Qualified Disability Trust: Meaning and Tax Requirements,” the person receiving income from the trust must pay income tax. However, in 2003, the IRS added a section allowing some disability trusts to reduce this tax liability. This is another example of why reviewing estate plans every few years is important.

Trusts need to meet several requirements to be considered qualified disability trusts for tax purposes. However, if a special needs trust meets these criteria, it could save a lot in taxes.

Most special needs trusts already meet the requirement to be treated as qualified disability trusts and can be reported as such at tax time. For 2022 tax year, the tax exemption for a QDisT is $4,400. For tax year 2023, the amount will increase to $4,700. Income from a QDisT is reported on IRS Form 1041, using an EIN, while distributions to the beneficiary will be taxed on their own 1040 form.

The best way to fully understand a QDisT is through an example. Let’s say a child is diagnosed with a disability, and their grandparents contribute $500,000 to an irrevocable special needs trust the child’s parents have established for the child’s benefit. The trust generates $25,000 in annual income, and $10,000 is used annually for expenses from the child’s care and other needs.

Who pays the income tax bill on the trust’s gains? There are a few options.

The parents could include income from the trust as part of their taxes. This would be “on top” of their earned income, so they will pay their marginal tax on the $25,000 generated from the trust—paying $8,000 or more.

Alternatively, trust income spent for the child’s benefit can be taxed to the child—$10,000, as listed above. This would leave $15,000. However, this must be taxed to the trust. Trust income tax brackets are high and increase steeply. Paying this way could lead to higher taxes than if the parents paid the tax.

The QDisT was designed to alleviate this problem. QDisTs are entitled to the same exemption allowed to all individual taxpayers when filing a tax return. In 2012, for instance, the personal tax exemption was $3,800, so the first $3,800 of income from QDisTs wasn’t taxed.

The deduction for personal exemptions is suspended for tax years 2018 to 2025 by the Tax Cuts and Jobs Act, except the same law said that in any year there isn’t a personal exemption, the exemption will be allowed for a QDisT.

For tax year 2022, $4,400 is the indexed tax exemption amount for these trusts, including most special needs trusts. For tax year 2023, the amount will increase to $4,700.

To be reported as a qualified disability trust, specific requirements must be met:

The trust must be irrevocable.
The trust must be established for the sole benefit of the disabled beneficiary.
The disabled beneficiary must be under age 65 when the trust is established.
The beneficiary must have a disability included in the definition of disabled under the Social Security Act.
The trust must be a third-party trust, meaning all funding must come from someone other than the disabled beneficiary.

An experienced estate planning attorney can help set up a qualified disability trust that can help reduce the tax burden and allow you to enjoy the benefits the statute grants. If you would like to learn more about special needs planning, please visit our previous posts.

Reference: Investopedia (March 4, 2023) “Qualified Disability Trust: Meaning and Tax Requirements”

Take Care when using a Self-Directed IRA

March 29, 2023

For some people, a self-directed IRA could be a great vehicle in which to invest tax-advantaged retirement funds in real property. However, there are rules governing everything from property ownership and usage to how you cover expenses and take profits. If they aren’t followed, you can easily run afoul of the IRS. Take care when using a self-directed IRA.

Forbes’ recent article entitled “How To Use A Self-Directed IRA For Real Estate Investing” explains that a real estate IRA is just another name for a self-directed IRA that’s designed to hold investment property. You can own a wide range of property types in a real estate IRA. This includes land, single and multi-family homes, international property, boat docks, commercial properties and more. Because this is a type of self-directed IRA, the custodian—the company safeguarding your account and enforcing IRS regulations—allows you to hold alternative asset classes, like real estate.

First, find a custodian that allows or even specializes in real estate IRAs. Next, you need to fund your account—typically with a rollover from an existing IRA. With your cash in place, you can buy real estate and have it titled in the name of your IRA. You can finance real estate in your IRA with an investment property-specific mortgage. You can then pay the mortgage using additional cash from your self-directed IRA. When you sell a property held in a real estate IRA, the funds stay in the account. Depending on the type of IRA you’ve selected, those funds grow tax-deferred (traditional IRA) or tax-free (Roth IRA).

A real estate IRA allows you to diversify away from stocks and bonds. However, there are many rules governing this specialized type of account. Let’s look at some of the key rules you must know:

Property Title. Real estate that is held in a self-directed IRA is owned by the account, rather than by you personally. Therefore, the title documents that confirm ownership of the property are in the name of your IRA, rather than in your name.

Expenses and Income. All expenses and income flow into and out of your real estate IRA. All property taxes, utility bills and other expenses are paid by your account. All rental income or other income is paid back into your account.

Limitations on Use. Real estate held in a self-directed IRA can only be an investment property. You and any member of your family—plus any of your beneficiaries or fiduciaries—are referred to as disqualified persons. Since the purpose of an IRA is retirement investing, these disqualified persons can’t make use of the real estate assets.

No DIY. If you need to fix up or repair property held in a real estate IRA, the account must pay for the work. It can’t be performed by a disqualified person (you).

Prior Property Ownership. You can’t sell, lease, or exchange property you already own to your real estate IRA. That’s called “self-dealing,” which the IRS strictly prohibits.

Watch Out for the UBIT. If you take out a loan that’s secured by the property itself (a non-recourse loan), you will be required to pay unrelated business income tax (UBIT) on any profits related to the financed portion. However, you can use depreciation and operating costs to reduce your tax bill, which can allow you to reduce your UBIT or eliminate it altogether.

A self-directed IRA can be a wonderful tool to utilize retirement funds for real estate, but take care when using it. If you would like to learn more about retirement accounts and estate planning, please visit our previous posts.

Reference: Forbes (Feb. 13, 2023) “How To Use A Self-Directed IRA For Real Estate Investing”

Corporate Transparency Act May Impact Estate Planning

March 21, 2023

A recent federal law, the Corporate Transparency Act may have a have an impact on your estate planning. The law mandates reporting to the government that may affect many of those who’ve done estate planning, asset protection planning, or own real estate. Forbes’s recent article entitled “Corporate Transparency Act Affects Your Estate Plan” explains that, while users of this information are supposed to be carefully limited to governing agencies, its breadth and disclosures, may seem invasive.

The goal of the new legislation is to wade through the entity formalities and find out who truly owns the company and its assets. The Act is part of a growing worldwide effort to thwart illegal activities, including tax evasion, money-laundering, tax fraud and other financial crimes.

This type of reporting is new to the U.S. The rules are quite different than anything that’s been around in the past. The law is designed to have the U.S. catch up to the reporting standards common in other developed countries. These reporting requirements are very different from tax returns.

The CTA reporting requirements could affect the owners or principals behind or involved in almost all business entities. This includes limited liability companies (LLCs), corporations, limited partnerships and other closely held entities. Most of the entities created as part of your planning may be subjected to the new rules:

Investment planning might include forming a holding company to aggregate securities and other investments. A small business or a rental real estate property are typically segregated into separate entities to avoid a domino effect, if there is a lawsuit involving the underlying asset.
Your estate plan might include the creation of one or more LLCs designed to hold other assets or even other entities to facilitate trust funding or trust administration. A family limited partnership might be created to hold investment assets for management or estate tax valuation discount purposes.
If you’re doing asset protection planning, an experienced estate planning attorney may help you to form different entities to insulate the underlying assets from claims of creditors.

Experts say there could be more than 30 million entities that will be required to file. Work closely with your estate planning attorney to see how the corporate transparency act may impact your estate planning. If you would like to learn more about the LLCs and business planning, please visit our previous posts.

Reference: Forbes (Feb. 26, 2023) “Corporate Transparency Act Affects Your Estate Plan”

Irrevocable Grantor Trust can reduce Tax exposure

March 16, 2023

Forbes’ recent article entitled “How To Pass On Business Assets While Paying As Little In Taxes As Possible” says that one of the first steps you’ll likely undertake in an estate plan is gifting assets so they’re not part of your estate. By gifting assets expected to appreciate over time—like company stock and real estate—into an irrevocable grantor trust and having those assets appreciate outside of your estate, you can reduce your estate tax exposure. Remember: the amount you can gift is restricted to you and your spouse’s combined lifetime federal estate and gift tax exemption ($25,840,000 in 2023).

As the grantor of the irrevocable grantor trust, you’ll be taxed on all income in the trust despite not receiving any of it. However, the payment of taxes from your estate reduces the value of your estate proportionately. Therefore, the assets in the trust can grow unburdened by taxation.

A drawback of gifting appreciating assets into a grantor trust is that the assets will retain the tax basis you, as the grantor, had when you gifted the assets. As the assets are no longer a part of your estate when you die, the assets you transferred to the grantor trust won’t get a step-up in basis to what their value is at that time. Capital gains taxation occurs when the trustee or beneficiary sells the appreciated assets.

Assuming that one of your goals for establishing the trust is to pay as little tax as possible, there are a few ways to avoid capital gains taxes inside a grantor trust.

As the grantor, you have the power to take trust assets back by buying them with cash or replacing them with other assets—low-appreciation ones are ideal. Therefore, if you get a large amount of your employer’s publicly traded stock, you might swap these shares for other publicly traded securities of equal value that have appreciated.

Since the assets traded must be equal in value, there shouldn’t be a change to your estate’s value used for calculating estate taxes. After the trade, you’ll own the highly appreciated stock. However, there won’t be a taxable gain when you pass away because you’ll get a step-up on the basis.

Likewise, for grantor trusts with appreciated real estate, an IRC §1031 exchange allows for capital gains taxes to be deferred when swapping one real estate investment property for another. Discuss with your estate planning attorney how an irrevocable grantor trust can reduce your estate tax exposure. If you would like to learn more about trusts and tax planning, please visit our previous posts.

Reference: Forbes (Dec. 22, 2022) “How To Pass On Business Assets While Paying As Little In Taxes As Possible”

How to Avoid Common IRA Errors

March 15, 2023

To help you sidestep some of the most common blunders and get the most out of your IRA investments, Kiplinger’s recent article entitled “Don’t Make These Common IRA Mistakes” points out how to avoid the most common IRA errors.

Not Planning for the “Second Half”. It’s really about two halves. You accumulate wealth in the first half and withdraw it in the second. Many people only play the first half of the game: they focus only on saving as much as possible in their IRA account. However, with retirement saving, it’s not how much you have. It’s how much you can keep after taxes.

Converting to a Roth All at Once. If you think your tax rate will be higher when you retire than it is right now, converting a traditional IRA to a Roth IRA this year might be smart. In the end, the total tax you owe on those funds may be lower by taking that step. However, a Roth conversion has a tax bill on your next return. The “mistake” those people sometimes make is thinking they have to convert the entire account at once. Instead, you can do partial conversions.

Exceeding Roth IRA Income Limits. There are annual contributions limits for both traditional IRAs and Roth IRAs. However, for Roth IRAs only, there are also income limits. If you’re single, the amount you can contribute to a Roth IRA account in 2022 is gradually reduced to zero, if your modified adjusted gross income is between $129,000 and $144,000 ($204,000 to $214,000 for joint filers).

Doing Indirect Rollovers. Many people have trouble when they attempt to move money from one retirement account to another. If you take money out of an IRA account and the check is in your name, you only have 60 days to roll that money over into another retirement account before the withdrawn funds are deemed taxable income. This is an indirect rollover. For IRA-to-IRA transfers, you can only do one indirect rollover per year.

Forgetting to Account for All RMDs. You must start taking required minimum distributions (RMDs) when you reach 72. Some people miss an RMD or don’t take it for all of their accounts subject to the RMD rules. Other people miscalculate and don’t withdraw enough money. These can be costly mistakes, because you could be hit with a stiff penalty for violating the RMD rules.

These are simply the most common IRA errors to avoid, but there can be additional issues that you need to be aware of. Take the time out to consult with your financial advisor and your estate planning attorney to make sure you are covered. If you would like to learn more about retirement accounts, please visit our previous posts.

Reference: Kiplinger (July 25, 2022) “Don’t Make These Common IRA Mistakes”

What Is a Tax Reimbursement Clause?

February 13, 2023

What Is a Tax Reimbursement Clause? To understand a tax reimbursement clause, you must first understand what a grantor trust is, and how it works. A grantor trust means the person creating the trust, also called a trustor or grantor, is responsible to pay the income tax on income earned by the trust.

According to the article “Tax Reimbursement Clauses: What They Are And Why You Need To Know” from Forbes, these clauses were established when marginal income tax rates were much higher than they are today and taxpayers tried to save taxes by shifting income to a trust which paid a much lower income tax. Congress reacted by creating rules to cause the income of some trusts to be taxed to the grantor. However, tax experts reimagined the new laws and found a way to use the clause to benefit estate plans.

In 1986, when non-grantor trusts were taxed in a harsher way, grantor trusts were used for estate tax planning purposes. When assets were shifted into a trust, the goal is to have them grow rapidly and be protected by the trust. An increase in value of assets in the trust means less value in your taxable estate and outside the reach of creditors.

If you pay the income tax on the income earned by the trust, it grows faster because the value of the trust is compounding on a tax-free basis. Tax free compounding growth is considered one of the most powerful ways to build wealth.

As you pay income taxes on trust income, the trust grows faster and the assets in and value of the remaining estate is reduced. This also reduces the assets subject to the estate tax.

The purpose of the clause is to provide funds to the grantor to pay the income tax on the income earned by the grantor trust. What if the grantor trust tax becomes too much of a good thing, or if you don’t want to keep paying the income tax on the trust’s income?

If the trust can reimburse you for the income tax, it may help with cash flow concerns.

Talk with your estate planning attorney about the pros and cons of including a tax reimbursement clause in your trust. Some estate planning attorneys insist that a tax reimbursement clause must be included in every grantor trust, while others never use them. They are concerned that they may increase the risk of all trust assets being included in your estate as a result of the tax reimbursement clause being viewed as a retained right in the trust, or you as a beneficiary of the trust.

The decision depends upon your situation and your state laws. The improper use of a tax reimbursement clause might cause estate inclusion, in which case great care needs to be used before including this provision. However, there have been so many cases of taxpayers misusing tax reimbursement clauses that not including them may also make sense.

Every trust has its own language and the exercise of any tax reimbursement clause must comply with the terms of the trust.

Talk with your estate planning attorney about understanding what a tax reimbursement clause is and if it is appropriate for you. If you would like to learn more about taxes and estate planning, please visit our previous posts.

Reference: Forbes (Jan. 8, 2023) “Tax Reimbursement Clauses: What They Are And Why You Need To Know”

Ideas to improve Business Succession Planning

February 9, 2023

Winter is a slower season for farmers and ranchers. It offers family business leaders time to plan for the future. A recent article from Progressive Farmer, “Family Business Matters: Eight Practical Succession Ideas,” lists ideas to improve business succession and estate planning efforts.

Update balance sheets. Families who own land passed through generations don’t always like to show the land at its current fair market value. Even if you intend to never sell the land, creating an estate plan requires an accurate valuation of all assets to minimize the consequences of estate and income taxes.

Chart ownership for the future. Family members often have no understanding of how they will achieve ownership of the business and its assets. Will it be a gift? Will there be taxes to pay? Or will it be a sale? Will they need to buy out non-farming family members? Without clear answers to these and related questions, people may find themselves operating on assumptions, which almost always leads to conflict or family fractures.

Start handing off management tasks sooner, not later. Plan for the transition by starting with discrete business functions. This could be as straightforward as making decisions about equipment, purchasing crop insurance, or enrolling in a Farm Service Agency. This gives the senior generation the ability to delegate and observe, while empowering and more fully engaging the next generation.

Refresh estate planning documents. People often neglect to update estate documents. Review wills, trusts, trustees, beneficiary designations, advance medical directives and power of attorney documents. Are the people named in various roles still appropriate? Does your estate still work, in light of changing tax laws? This should happen at least every three to five years.

Assess tax consequences of exiting the business. Part of retirement funding is the tax liability of leaving the family business. Deferred income, prepaid expenses and fully depreciated equipment can lead to significant tax exposure. Three to five years ahead of your departure, start mapping out a plan with your accountant, estate planning attorney and financial advisor.

Create a relationship between family members and landowners. If you rent property from an absentee landowner, those relationships will be vital to continuing the business. You may not be able to influence the landowner at the time of transition to the next generation. However, establishing relationships with family members who will take over for you can reduce friction.

Communicate the benefits family members will get from working together to maintain the business. Passing land from one generation to the next often means siblings or cousins become business partners, with undivided interests in the land or as shareholders or members of some legal entity. Family members who may not get along will benefit from having a “buy-sell agreement” in place. This spells out how partners can buy out each other’s interest if one or more family members want to sell. Talk with your estate planning attorney to establish an agreement in advance of anyone leaving the business to reduce the potential of family conflict.

These are just a few ideas to improve business succession planning. Discuss your goals with your family and your estate planning attorney so a solid plan is in place. If you are interested in reading more about succession planning, please visit our previous posts.

Reference: Progressive Farmer (Jan. 1, 2023) “Family Business Matters: Eight Practical Succession Ideas”

Photo by Ketut Subiyanto

Situations where Beneficiaries may pay Taxes on Life Insurance

February 7, 2023

While death benefits are usually tax-free, there are a few situations where the beneficiary of a life insurance policy may have to pay taxes on the lump sum payout. When people purchase life insurance policies, they designate a beneficiary who will benefit from the policy’s proceeds. When the life insurance policyholder dies, the policy’s beneficiary then receives a payout known as the death benefit.

Yahoo Finance’s recent article entitled “Will My Beneficiaries Pay Taxes on Life Insurance?” says the big advantage of buying a life insurance policy is that, upon death, your beneficiaries can get a substantial lump sum payment without taxation, unless the amount of the life insurance pushes your estate above the applicable federal estate tax exemption. In that case, your estate will need to pay the tax.

When you earn income from interest, it’s typically taxable. Therefore, if the beneficiary decides to delay the payout instead of receiving it right away, the death benefit may continue to accumulate interest. The death benefit won’t be taxed. However, the beneficiary will typically pay taxes on the additional interest.

If a life insurance policyholder decides to name their estate as the death benefit beneficiary, the estate could be subject to taxation. When you don’t designate a person as your beneficiary, the proceeds from the life insurance policy are subject to Section 2024 of the IRS code. That says if the gross estate incorporates proceeds of a life insurance policy, the value of a life insurance policy must be payable to the estate directly or indirectly or to named beneficiaries (if you had any “incidents of ownership” throughout the policy term).

The proceeds of a life insurance policy may also pass to the estate if the beneficiary dies, and there are no contingent beneficiaries. If you have a will in place, the proceeds will be paid out according to the terms of the will. If there’s no will in place, the probate court decides the way in which to distribute your assets.

The individual insured on a life insurance policy and the policyholder are usually the same person. The policyholder then names a beneficiary. However, a gift tax may apply if the insured, the policyholder and the beneficiary are three different parties. Because the IRS assumes the death benefit was a gift from the policyholder to the beneficiary, you might have to pay gift taxes on the death benefit.

Beneficiaries usually won’t have to pay taxes on life insurance proceeds. However, beneficiaries may encounter some situations where life insurance proceeds can result in taxes. Be sure that your beneficiary designations are clearly outlined in the policy to avoid taxation. If you would like to learn more about life insurance and estate planning, please visit our previous posts.

Reference: Yahoo Finance (Jan. 17, 2023) “Will My Beneficiaries Pay Taxes on Life Insurance?”

Tips to Reduce Size of your Taxable Estate

January 23, 2023

The current lifetime estate and gift tax exemption is set to be cut by half after 2025, unless Congress acts to extend it, which doesn’t seem likely in the current financial environment. There are tips to help reduce the size of your taxable estate, reported in a recent article “Smarter Ways To Make Estate Planning Gifts” from Forbes.

It’s generally better to give property than to give cash, especially investment property. Recipients are less likely to sell these gifts and spend the proceeds. It’s more likely that cash will be spent rather than invested for the long term. Investment property is almost always a better gift for the long term.

However, property gifts come with potential taxes. To help reduce the size of your taxable estate, make gifts of the correct properties. There are a few principals to follow.

Don’t give investment property with paper losses. The recipient of a gift of property gets the same tax basis in the property as the person making the gift. The appreciation occurring during the holding period is taxed when the gift recipient sells the property.

If the property didn’t appreciate when the owner had it, the beneficiary’s tax basis will be the lower of the owner’s basis and the current market value. When the investment lost value, the beneficiary reduces the basis to the current fair market value. The loss incurred for the owner won’t be deductible by anyone. There is no winner here. It is best for the owner to hold the loss property or sell it, so at least they can deduct the loss and gift the after-tax proceeds.

Give appreciated investment property after a price decline. This makes maximum use of the annual gift tax exclusion and minimizes the use of the giver’s lifetime estate and gift tax exemption. You can give more shares of a stock or mutual fund by making the gift when prices are lower.

Let’s say shares of a mutual fund were at $60—you could give 266.67 shares tax free under the annual gift tax exclusion ($17,000 in 2023). If the price dropped to $50, you could give 320 shares without exceeding the exclusion limit.

When the recipient holds the shares and the price recovers, they will have received more long-term wealth. The giver would not have incurred estate and gift taxes or used part of their lifetime exemption.

This is also an example of why families should consider gift giving throughout the year and not just at year’s end. An even better way: determine early in the year how much you intend to give, and then look for a good time during the year to maximize the tax-free value of the gift.

It’s good to give property most likely to appreciate in value. If the goal is to remove future appreciation from the estate, gift property you expect to appreciate. This also serves to maximize the wealth of loved ones, especially appreciated when the beneficiary is in a lower tax bracket. When the property is eventually sold, the beneficiary likely will pay capital gains taxes on the appreciation at a lower rate than the giver would. You pass on more after-tax wealth and reduce the family’s overall taxes.

Retain property if it has appreciated significantly. When it’s time to sell the property and the loved one is in the 0% capital gains tax bracket, it’s best to make a gift of the property and let them sell it. Even if the loved one is in the 10% capital gains tax bracket, this still make sense if you’re in the higher capital gains tax bracket. But there are some things to consider. If the gain pushes the recipient into a higher tax bracket and triggers higher taxes on all their income, it won’t be a welcome gift. If there’s no urgent need to sell the property, you can ensure a 0% capital gain by simply holding onto the investment.

Give income-generating assets. If you hold income-generating investments and you don’t need the income, consider giving those to family members in a lower tax bracket. This reduces taxes on the income and the recipient is also less likely to sell the asset to raise cash when it’s generating income.

Remember the Kiddie Tax. Heirs who are age 19 or under (or under 24 if they are full-time college students) are hit with their parents’ highest tax rate on investment income they earn above a certain amount, which was $2,300 in 2022. At this point, gifts of income-producing property create tax liabilities, not benefits.

These are just a few tips to help you reduce to size of your taxable estate. Work with your estate planning attorney to identify any additional tax reductions available. If you would like to learn more about tax planning, please visit our previous posts.

Reference: Forbes (Dec. 27, 2022) “Smarter Ways To Make Estate Planning Gifts”

Category: Tax Planning

Asset Protection Trusts can address Long Term Care

Qualified Disability Trust can reduce Tax Burden

Take Care when using a Self-Directed IRA

Corporate Transparency Act May Impact Estate Planning

Irrevocable Grantor Trust can reduce Tax exposure

How to Avoid Common IRA Errors

What Is a Tax Reimbursement Clause?

Ideas to improve Business Succession Planning

Situations where Beneficiaries may pay Taxes on Life Insurance

Tips to Reduce Size of your Taxable Estate

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