New York Estate Planning & Elder Law Blog
Tax preparation is one of the most important considerations when creating an estate plan. Whenever a person or business creates an estate plan, there are multiple types of taxes to avoid – inheritance taxes, estate taxes, and income taxes, to name a few. Without a proper estate plan, these taxes can eat into a large portion of the estate.
Here are several common estate planning strategies that could reduce your tax liability:
- Marital Transfers. If both spouses in the marriage are American citizens, then lifetime gifts or bequests at death between them not be subject to estate taxes.
- Family Limited Partnership. A family limited partnership is technically a business entity. In a family limited partnership, the family business, or collective assets of the family, are all “pooled” into the family limited partnership. The family members then own “shares” of the business organization. Because this is a business entity, none of the assets are owned by any family member and therefore, will not be included in any estate upon death.
- Irrevocable Life Insurance Trust. With an irrevocable life insurance trust, a person may transfer the amount equal to the life insurance premium to an irrevocable life insurance trust. Over time, these payments enable a much larger asset at the time of death – the life insurance payout. When a life insurance policy is paid upon death, the proceeds are not included in the estate and are therefore not taxable.
- Gifts. As of 2018, a person may gift up to $15,000 to a person each year before there are any tax consequences. For married couples, the annual “gift tax exclusion” increases to $30,000 a year, according to the IRS. By “gifting” the maximum amount each year tax-free, an individual or married couple may be able to significantly reduce the size of their estate that will still need to be transferred upon their death. Because the assets were already transferred tax-free, anything previously “gifted” will not run the risk of being subject to any taxes at the time of death.
- Medical and Education Payments. A person who directly pays the tuition or medical expenses of another person will not be taxed on that payment. For parents and grandparents who plan on paying for their child or grandchild’s college expenses anyway, this can also be a helpful way to contribute while also avoiding estate taxes.
While these may be some of the more popular tax planning techniques used in estate planning, each person’s individual circumstances and objectives mean that no two estate plans look the same. It is important to speak with a knowledgeable estate planning attorney to ensure that your wishes will be fully carried out upon death and in the most tax-efficient manner possible.