Estate taxes can significantly impact the wealth you intend to pass on to your heirs. Understanding these taxes and employing effective strategies to minimize tax liabilities is crucial for preserving your estate. Estate taxes are imposed at both federal and state levels, and without proper planning, a substantial portion of your estate's value could be lost to taxes. This article explores various strategies to minimize estate tax liabilities, including lifetime gifting, charitable donations, and the use of trusts.

Federal and State Estate Tax Thresholds

Estate taxes are calculated based on the value of the estate at the time of the owner's death. The federal government imposes an estate tax on estates exceeding a certain threshold, known as the federal estate tax exemption. As of 2023, the federal estate tax exemption is $12.92 million per individual, meaning that only estates valued above this amount are subject to federal estate taxes. It's important to note that this exemption amount is subject to change based on legislative adjustments.

In addition to federal estate taxes, many states impose their own estate taxes, which often have lower exemption thresholds than the federal level. For example, states like New York and Massachusetts have estate tax exemptions significantly lower than the federal threshold. Understanding both federal and state estate tax thresholds is essential for comprehensive estate planning.

Lifetime Gifting: Reducing the Taxable Estate

One effective strategy to minimize estate tax liabilities is through lifetime gifting. By gifting assets to your heirs during your lifetime, you can reduce the value of your taxable estate. The federal government allows an annual gift tax exclusion, which permits individuals to gift a certain amount to any number of recipients each year without incurring gift taxes. As of 2023, the annual gift tax exclusion is $17,000 per recipient.

Additionally, lifetime gifting can take advantage of the lifetime gift tax exemption, which is currently set at the same level as the federal estate tax exemption. This means you can gift up to $12.92 million over your lifetime without incurring federal gift taxes. Strategic lifetime gifting can significantly reduce the size of your taxable estate, thereby minimizing estate tax liabilities.

Charitable Donations: Leveraging Philanthropy for Tax Savings

Charitable donations are another powerful tool for reducing estate tax liabilities. When you make a charitable donation, either during your lifetime or through your will, the value of the donation is deducted from your taxable estate. This not only supports causes you care about but also provides significant tax benefits.

Charitable remainder trusts (CRTs) and charitable lead trusts (CLTs) are specialized trust arrangements that can further enhance the tax benefits of charitable giving. A CRT allows you to receive income from the trust for a specified period, with the remaining assets going to charity upon termination. This provides an immediate tax deduction for the charitable remainder interest while potentially reducing estate taxes. On the other hand, a CLT provides income to a charity for a specified period, with the remaining assets eventually going to your heirs, thus reducing the taxable estate and preserving family wealth.

Utilizing Trusts: Protecting Assets and Reducing Tax Liabilities

Trusts are versatile estate planning tools that can effectively minimize estate tax liabilities while providing control and protection over your assets. By placing assets into a trust, you can reduce the size of your taxable estate and ensure that your wealth is managed according to your wishes. Several types of trusts can be particularly beneficial for estate tax planning:

Irrevocable Life Insurance Trusts (ILITs): An ILIT removes life insurance proceeds from your taxable estate, providing significant tax savings. By transferring ownership of your life insurance policy to an ILIT, the proceeds are not included in your estate, thus avoiding estate taxes. The trust can then distribute the insurance proceeds to your beneficiaries tax-free.

Grantor Retained Annuity Trusts (GRATs): A GRAT allows you to transfer assets into a trust while retaining the right to receive an annuity payment for a specified period. The remaining assets, including any appreciation, pass to your beneficiaries tax-free at the end of the trust term. GRATs are particularly effective for transferring appreciating assets, such as stocks or real estate, to heirs without incurring significant estate taxes.

Qualified Personal Residence Trusts (QPRTs): A QPRT allows you to transfer your primary residence or vacation home into a trust, reducing the taxable value of your estate. You can continue to live in the residence for a specified period, after which the property is transferred to your beneficiaries. This strategy can significantly reduce the estate tax burden on valuable real estate holdings.

Strategic Use of Exemptions and Deductions

Effective estate tax planning involves maximizing the use of available exemptions and deductions. In addition to the federal and state estate tax exemptions, other deductions can further reduce your taxable estate:

Marital Deduction: The unlimited marital deduction allows you to transfer an unlimited amount of assets to your spouse free of estate and gift taxes. Utilizing the marital deduction can defer estate taxes until the death of the surviving spouse, providing time to implement additional tax-saving strategies.

Portability: Portability allows a surviving spouse to inherit the unused portion of the deceased spouse's federal estate tax exemption. By electing portability, the surviving spouse can effectively double their estate tax exemption, providing significant tax savings for larger estates.

Planning for Future Legislative Changes

Estate tax laws are subject to change, making it essential to stay informed about potential legislative updates that could impact your estate plan. Working with experienced estate planning attorneys can help you adapt to changes in tax laws and ensure that your plan remains effective. Regularly reviewing and updating your estate plan can help you take advantage of new opportunities for tax savings and avoid potential pitfalls.

Ensuring a Tax-Efficient Estate Plan

Minimizing estate tax liabilities requires careful planning and a proactive approach. By understanding federal and state estate tax thresholds, leveraging lifetime gifting, incorporating charitable donations, and utilizing trusts, you can effectively reduce the tax burden on your estate and preserve more of your wealth for your heirs.

At Donohue, O'Connell & Riley, we specialize in crafting tax-efficient estate plans tailored to your unique needs and goals. Our experienced attorneys can guide you through the complexities of estate tax planning, ensuring that your assets are protected and your legacy is secured. Contact us today to schedule a consultation and take the first step toward a tax-efficient estate plan that maximizes the value of your estate for future generations.

Integrating charitable giving into your estate plan is a meaningful way to support the causes you care about while also gaining potential tax benefits. Thoughtful philanthropic strategies can ensure that your charitable contributions have a lasting impact and are managed efficiently. Whether you aim to leave a legacy, support a specific cause, or achieve tax savings, various charitable giving strategies can help you achieve your goals. This article will explore some of the most effective strategies, including donor-advised funds, charitable trusts, and the tax benefits of charitable donations.

Donor-Advised Funds

Donor-advised funds (DAFs) are a flexible and efficient way to manage your charitable giving. A DAF is a philanthropic vehicle established at a public charity. Donors can make a charitable contribution to the fund, receive an immediate tax deduction, and then recommend grants from the fund to their favorite charities over time.

One of the significant advantages of a donor-advised fund is its simplicity. You can contribute cash, securities, or other assets to the fund, and the public charity takes care of the administrative tasks. Additionally, the assets in the DAF can be invested and grow tax-free, increasing the amount available for charitable giving. This approach allows you to take a more strategic approach to philanthropy, distributing funds to charities when it makes the most sense for both the donor and the recipient.

Charitable Trusts

Charitable trusts are another powerful tool for maximizing the impact of your philanthropy. There are two main types of charitable trusts: charitable remainder trusts (CRTs) and charitable lead trusts (CLTs). Each type of trust offers unique benefits and can be tailored to fit your estate planning goals.

Charitable Remainder Trusts (CRTs): A CRT provides income to the donor or other beneficiaries for a specified period, after which the remaining trust assets are distributed to one or more charitable organizations. This setup allows donors to receive an immediate tax deduction for the present value of the charitable remainder interest while also potentially reducing estate taxes. Additionally, CRTs can be an effective way to diversify appreciated assets and defer capital gains taxes.

Charitable Lead Trusts (CLTs): A CLT works in the opposite way of a CRT. It provides income to one or more charitable organizations for a specified period, after which the remaining assets are distributed to the donor's heirs or other beneficiaries. This arrangement can reduce the donor's taxable estate and transfer significant assets to heirs at a reduced tax cost. CLTs are particularly useful for donors who want to support charities in the near term while preserving family wealth for future generations.

Tax Benefits of Charitable Donations

One of the significant advantages of incorporating charitable giving into your estate plan is the potential tax benefits. Charitable donations can reduce your taxable income and, consequently, your overall tax burden. Understanding how these tax benefits work can help you maximize the impact of your philanthropic efforts.

When you make a charitable donation, you may be eligible to receive a tax deduction for the fair market value of the donated assets. This deduction can be applied to your income tax return, reducing your taxable income for that year. In addition, donating appreciated assets, such as stocks or real estate, can help you avoid capital gains taxes. Instead of selling the assets and donating the proceeds, you can donate the assets directly to the charity, thereby eliminating the capital gains tax liability and maximizing the value of your contribution.

Furthermore, charitable donations can also reduce estate taxes. By including charitable bequests in your will or establishing charitable trusts, you can remove the value of these donations from your taxable estate. This strategy not only benefits the charitable organizations you support but also helps preserve more of your estate for your heirs.

Integrating Philanthropy into Your Estate Plan

Integrating philanthropy into your estate plan involves careful consideration and strategic planning. Here are some steps to help you effectively incorporate charitable giving into your estate planning process:

1. Identify Your Charitable Goals: Start by identifying the causes and organizations that matter most to you. Consider the impact you want to make and how you would like your legacy to be remembered.
2. Choose the Right Charitable Giving Strategies: Based on your goals, financial situation, and estate planning objectives, choose the charitable giving strategies that best align with your needs. This may include donor-advised funds, charitable trusts, direct donations, or a combination of these approaches.
3. Consult with Professionals: Work with experienced estate planning attorneys and financial advisors to develop a comprehensive plan that integrates your philanthropic goals. They can help you navigate the complexities of tax laws, trust administration, and other legal considerations.
4. Communicate with Your Family: Discuss your philanthropic intentions with your family and heirs to ensure they understand your wishes and support your goals. This can help prevent misunderstandings and ensure a smooth transition of your estate.
5. Review and Update Your Plan Regularly: As your financial situation, charitable goals, and tax laws change, it's essential to review and update your estate plan regularly. This ensures that your plan remains aligned with your intentions and continues to maximize the impact of your charitable giving.

Ensuring Your Philanthropic Legacy

Incorporating charitable giving into your estate plan is a powerful way to make a lasting impact on the causes you care about while also benefiting from potential tax advantages. By exploring strategies such as donor-advised funds, charitable trusts, and understanding the tax benefits of donations, you can create a comprehensive plan that aligns with your philanthropic goals and estate planning objectives.

At Donohue, O'Connell & Riley, we specialize in helping individuals and families integrate philanthropy into their estate plans. Our experienced attorneys can guide you through the process, ensuring that your charitable giving is both impactful and beneficial for your overall estate plan. Contact us today to schedule a consultation and start planning your philanthropic legacy.

Administering a trust or an estate is an important responsibility. In addition to keeping track of all relevant assets, income and expenses, executors must attend to the interests of the beneficiaries while often undergoing the grieving process themselves. Here are five common mistakes to avoid:

1. Failure to Consider Carrying Costs

Carrying costs can quickly accumulate and eat away at the value of an estate, so when it comes to the estate settlement process, time is money. The executor should ensure that ongoing costs such as property taxes, insurance and lawn care or snow removal are met, while acting decisively to liquidate assets that cost the estate money.

Other costs may include making necessary repairs and reviewing insurance coverage for a vacant home. It is recommended that the executor organizes the sale or transfer of the home as soon as is practicable.

2. Failure to Consider Opportunity Costs 

Just as the value of a decedent’s residence is subject to carrying costs, there are opportunity costs to leaving assets in an estate as well. Inflation will inevitably diminish the value of assets held in an estate. Also, some assets may be subject to unexpected losses and could be put to better use in other investments or be used to pay down debt and thereby reduce interest payments and fees. Over time, these opportunity costs can reduce a person’s legacy by 10 percent per year or more. A prudent executor will work quickly to gather and distribute all assets from the estate as soon as is legally permissible, giving the beneficiaries the opportunity to use or grow their inheritance.

3. Sentimentality and Slow Decision Making 

As the executor of a loved one’s estate you will need to process your own grief while also making practical decisions. It may be helpful to think of your role as an executor as a professional responsibility, separate from your obligation to the decedent as a family member or friend. This will give you the distance to make business-like decisions for the estate, and not sink into sentimentality. The decedent trusted you to be organized, diligent and professional in carrying out their final wishes in a prudent and expeditious fashion. If the decedent was a loved one, it may be beneficial – even healing – for you and other beneficiaries to spend some time examining their possessions and revisiting memories. Beware, though, of getting lost in minutiae as it can quickly increase your costs while not significantly increasing your inheritance.

4. Not Hiring Professional Help

Many individuals adopt a “do it yourself” approach to administering an estate instead of hiring professionals, such as accountants, appraisers, lawyers and contractors. What many people don’t realize is that by “DIY-ing” it, the savings to any one beneficiary is low, but the liability for the executor can be extremely high. If you or another non-professional unknowingly violate building codes, miss deadlines, or simply fail to acquire necessary licenses or permits, beneficiaries may seek to impose liability. In addition, a good accountant and attorney are well worth their fees for what they may save you in taxes and time.

5. Ignoring the Calendar 

Be sure to keep track of tax filing dates, real estate cycles, and seasonal costs. For most clients, filing estate and trust income tax returns on a calendar year (vs. fiscal year) basis makes the most sense. As a result, you will want to keep an eye on the calendar so that you can reduce the number of years required for filing returns. Imagine a client who passed away late in the year: most likely, it will be impossible to close out his or her estate in a few months, and therefore tax returns may be required for two years at least. 

Real estate cycles are also important to keep in mind regarding the sale of the decedent’s home, which is often their largest asset. Allow appropriate time to clear out a residence, make needed repairs, and hire professional cleaners to present the property in a good light, but do not embark on a program of major capital improvements. Realtors say that March, April and May are the best months to list a home, while November and December are the worst. In addition to putting a home on the market when it has the best chance of selling for a high price, it is important to think about allowing yourself enough time between the sale and the applicable filing deadlines to file all necessary paperwork and tax returns.

Summing Up

As you can see, an executor is trusted with dozens of projects, many of which interrelate. Getting stuck at any one stage can lead to delays and disruptions which over time compound and can create enormous opportunity costs which in turn can result in liability to the executor or trustee. Navigating the winding path between decisive action and careful consideration can prove tricky without the guidance of a seasoned professional. At Donohue, O’Connell & Riley, our attorneys have “seen this movie before” and even though this might be your first time serving as an executor or trustee, it is definitely not ours. Our attorneys have collectively spent over 100 years administering trusts and estates and can guide you along the long road to the conclusion of the estate administration process, while providing an independent perspective at one degree of removal from the difficult emotional circumstances that you will be handling.

The quality of your retirement can be impacted by state-level taxes, such as income, sales and property taxes. Taxes tend to lead to inflation, meaning the cost of living trends higher in high tax states. Your spending power will thus be greater in states with low state taxes. Retiring in a state with high taxes, such as California where income taxes alone range up to 13%, means paying a large chunk of your retirement income to the state, diminishing your spending power. Consider how you plan to spend during retirement; do you prefer to make your home a vacation destination for others, or do you want to be the one travelling? If the latter, putting down roots in a small home in a state with low taxes may give you the financial freedom you want to see the country or the world. 

Still another factor to consider is the taxes payable upon death, commonly called estate taxes or inheritance taxes. An estate tax is based on the value of the decedent’s gross estate (all the real and personal property the decedent owned); whereas an inheritance tax is based on the relationship between the decedent and the beneficiary. The chart on the right identifies the states with a state-level death tax. Estate taxes are highest in Washington, which currently has a 20% estate tax on estates over $11.2 million. Other tough tax jurisdictions include Vermont, New York, Massachusetts, Rhode Island, Maryland, Oregon and Hawaii. Retirees who have family in these states may benefit from maintaining a primary residence in a low tax state, with a second home in the higher tax state.

Six states have an inheritance tax: New Jersey, Pennsylvania, Maryland, Kentucky, Nebraska and Iowa. Although bequests to spouses are exempt from inheritance tax, bequests to children, siblings, nieces and nephews, cousins, or close friends may bear a high tax. Crossing the border to a state without an inheritance tax can save your loved ones hundreds of thousands of dollars. For example, a niece who inherits from an aunt who passes away in New Jersey with a $5 million estate will pay approximately $750,000 to the State of New Jersey; however, if the same aunt died a New York resident, there would be no inheritance tax liability. 

Another way to take advantage of tax-friendly jurisdictions is by establishing a trust in that state. In New Hampshire, trusts are exempt from state-level income, sales and estate taxes. Consider again a woman living in New York or New Jersey with a $7 million estate. If she were to transfer her investments to a New Hampshire trust, her niece could inherit from the trust without having to pay estate or inheritance tax. Often people find that the tax savings they enjoy by establishing a New Hampshire trust more than pay for the costs and fees associated with setting up and maintaining the trust. Each individual’s circumstances are different. Working with your investment advisor and accountant, our attorneys can create a custom estate plan that will maximize your spending power in retirement and help you navigate your own retirement map.