How to Avoid or Reduce Federal Estate Taxes
After spending your adult life saving and working hard, the last thing you want to think about is the taxes that may come out of your estate upon your death. Of course, taxes are an unfortunate part of life, but there are ways you can make it easier. Here are some simple ways to avoid or reduce federal estate taxes, but first, let’s answer some common questions about estate tax planning.
Does Florida Have Estate Taxes?
No, the state of Florida does not impose estate taxes, inheritance, or gift taxes. So, if you establish residence in Florida, you do not have to worry about state estate taxes. However, there are federal estate taxes that are imposed for substantial estates. So, these are the estate taxes we’re discussing today.
How Much are Federal Estate Taxes?
Once you determine the federal government does impose estate taxes, you’re probably wondering how much. For the vast majority of people, there will be no estate taxes taken out. As of 2022, the estate tax law states that any estate valued over $12.06 million for an individual (or $24.12 million for a married couple) will be taxed at a rate between 18-40%. Therefore, any estate valued at less than $12.06 million is exempt from federal estate taxes.
With these common questions answered, let’s look at ways you can reduce estate taxes if you have a high net worth estate.
Gift Assets to Family
People avoid or reduce estate taxes by gifting part of their assets to family while they’re still alive. Be aware there is a gift limit before a gift tax is imposed. In 2022, you can give a person up to $16,000 a year without facing taxes. Anything above $16,000 is subject to a federal gift tax.
So, over the years, you can give your children, grandchildren, or other loved ones part of their inheritance before you die, and it won’t go through federal estate taxes upon your death. But, again, this is only useful if you have an estate worth over $12.06 million. If your entire estate is valued less than this, then your family’s inheritance will not be taxed federally or from the state of Florida.
Gift to Charity
Donating to charity is another way to avoid or reduce federal estate taxes. You would set up a special trust for charitable giving that would reduce the taxable value of your estate. Not only does this have tax benefits, it’s also an opportunity to leave a lasting legacy through your favorite charities. In order for this process to carry out smoothly without any issues, it’s critical to work with an estate planning attorney to help you set up any charitable trusts correctly.
For high-net-worth individuals, life insurance may not be on your radar, but it can help you reduce taxes on your estate. If you have a good life insurance policy that covers you, it can help cover some or all of the estate taxes. Some people choose to do this because it removes the burden on loved ones to pay the estate taxes from your estate. Additionally, it’s better to purchase a life insurance policy sooner than later since the cost increases the older you get.
Another way life insurance can help with estate taxes is to set up an irrevocable life insurance trust. This type of trust protects your life insurance benefits and transfers them to the beneficiaries without any tax implications. Overall, life insurance can be beneficial no matter the value of your estate.
Include Estate Tax Planning in Your Estate Plan
The best way to reduce any federal estate taxes is to be intentional about estate tax planning when you create your full estate plan. If you work proactively with any potential estate taxes, your family will have a much easier time managing your estate upon your death. You can do this easily with an estate planning attorney specializing in tax planning.
The Merriman Law Firm has experience in tax planning and working with high-net-worth individuals on their estate plans. When you have a substantial estate, it’s critical to include proper tax planning through estate planning so your family isn’t left with significant tax implications. The law professionals at The Merriman Law Firm have the tools and expertise to walk with you through every part of your estate plan and assist you as life changes through the years. Contact our law professionals today to get started.
If your current estate is not subject to estate taxes, The Merriman Law Firm can still assist with all your estate planning needs. We work with clients from all seasons of life with all estate sizes. So whether you are just looking for a simple will and trust or a larger estate plan, contact The Merriman Law Firm for a free initial consultation.