Top 3 Tips for Managing Estate Taxes

Much like filing your taxes, planning your estate is seldom easy and never fun. It requires you to think deeply about the circumstances you will leave your loved ones in after you pass. This can be tough to handle for anyone, but fortunately a good estate planning lawyer can help guide you though the process of planning an estate – a process that is often complex and fraught with pitfalls.

Estate planning is a challenging process, but preparation is key. For example, some people fail to consider the impact taxes will have on their estate, an avoidable mistake that costs American families millions of dollars each year. To make sure you don’t get caught up in the perils of poor estate planning, consider these helpful estate tax tips.

  1. Plan Ahead to Prevent Unnecessary Taxes – People tend to think that estate planning is something only the wealthy have to deal with. However, nothing could be further from the truth. Anyone who wants to have any say in where their pets, properties, or dependents go after they day must have a valid estate plan.There are several compelling reasons why you should start thinking seriously about planning your estate. For example, a well-planned estate will include mechanisms for minimizing transfer taxes. In fact, managing tax bills is one of the most common reasons why everyone needs an estate plan.The IRS and some local revenue agencies regulate how much money you can transfer, to whom, and under what circumstances without being taxed. Planning ahead to accommodate well-known taxes that affect your property after you die is always a good idea, and it can save your loved ones the unnecessary time and expense of figuring it all out after you’re gone. There are three key taxes to keep in mind when you’re planning your estate: the estate tax, the gift tax, and the transfer tax. 
  2. Manage Your Illinois Estate Taxes – The federal government imposes an Estate Tax on any transfer of property upon death. This requires a full accounting of everything you owned at the time of your death. Your possessions are assessed at either what you paid for them, or their fair market value. The total value of all items included in your estate – including personal property, real estate, cash, securities, trusts, annuities, insurance, and other assets – make up your so-called “gross estate.” Once you have calculated your gross estate, you may deduct certain liabilities, such as mortgaged and other debts, and claim any other deductions the estate may be responsible for. After all applicable deductions are paid, you file a Form 706 with the IRS declaring your liability.In addition to the federal estate tax, Illinois is among just a few states that collect estate tax. The state estate tax rate is progressive, going up to 16 percent. However, it is only applied to large estates, and outright transfers to surviving spouses or civil union partners are not taxable. For any taxable property passed on through a will or intestate transfer, Illinois estate taxes are due within nine months of the decedent’s passing, and the state requires filers to fill out and submit a federal estate tax return as well.In order to make the most out of your estate plan, it must be designed to minimize tax liability. Common strategies for minimizing estate taxes include establishing various types of trusts that allow you to avoid both the challenges of probate and the expense of the estate tax. However, there are several ways a good estate planning attorney can help you minimize your federal and state estate tax liability, so be sure to reach out to a local attorney when you’re ready to plan your estate.
  3. Plan for Gift Taxes – Most estate planning attorneys will recommend that you transfer as much property as you can to your intended beneficiaries during your lifetime to minimize the impact of estate taxes. However, this strategy is not as cut-and-dried as it may seem at first glance, as the IRS imposes taxes on large transfers of money you make as gifts to friends and loved ones. The gift tax is a federal tax levied on anything you give away to an individual with the expectation of receiving nothing in return. You can unintentionally trigger gift tax liability by accepting less than full market value for a piece of property or providing an interest-free or low-interest loan. However, taxpayers can transfer up to $14,000 ($28,000 for spouses) to any number of individuals in a single year without triggering gift tax liability. Additionally, taxpayers can give away up to $5.45 million during their lifetime about the standard $14,000 allowance without triggering gift tax liability.

A good estate planning attorney can help you minimize the value of your taxable gifts, such as by setting up a grantor retained annuity trust. Because taxes are assessed at value of the assets at the time of transfer into the trust and not when they are transferred to your beneficiaries, this arrangement helps reduce tax liability for your estate. Further, because the annuities are paid to the grantor over time, this type of trust can be a useful way to manage your funds in a tax-wise manner for retirement.

As innocuous as it may seem, the gift tax can really add up. If you don’t manage your tax liabilities proactively, your beneficiaries may end up thousands of dollars out of pocket. In federal taxes alone, the combined maximum tax rate for the federal estate and gift tax tops out at a whopping 40 percent. Adding on state and local taxes, it is over 50 percent. A local estate planning attorney can help you understand exactly what you need to do to avoid forcing your loved ones to give nearly half of all your property to the government when you pass away. Contact M&A Law Firm today for a free and easy discussion of your estate planning needs – it will certainly pay off.