When creating an estate plan, it is best to use tools and strategies that align with one’s goals and priorities. For many, their main priority is to protect their loved ones’ future. Others, on the other hand, have more specific goals, such as finding common tools and strategies to minimize their tax liabilities.
Maximizing benefits with these common tax-efficient tools
Some tools and strategies individuals commonly use to minimize tax liabilities include the following:
- Wills: Many people use wills to minimize tax liabilities by carefully structuring the distribution of their assets upon their death in a way that takes advantage of tax deductions, exemptions and credits. Examples of these strategies are unlimited marital deduction and pour over wills.
- Trusts: Trusts can be structured in various ways to minimize estate taxes. For example, a revocable living trust can help its assets avoid probate, while an irrevocable trust can remove assets from the taxable estate.
- Gifts: Making gifts during one’s lifetime can reduce their estate size and potentially lower estate taxes. For instance, an annual gift tax exclusion may allow an individual to give a certain amount to as many individuals as they would like without incurring gift tax.
- Life insurance: Life insurance proceeds are generally income tax-free to the beneficiary, and with proper planning, they can also be excluded from the taxable estate. This is often possible through a life insurance trust.
- Charitable donations: Donating to charity can provide an immediate income tax deduction and reduce an estate’s size, potentially leading to lower estate taxes.
While these strategies do not absolutely guarantee a reduced tax liability, especially since each case is unique and applying state laws differ, it can be beneficial to explore them.
Moreover, to ensure the effectivity of any estate plan tools and strategies, proper research and knowledgeable guidance are vital aspects to include in the process.