Estate planning is crucial in protecting your assets, securing your legacy, and ensuring your loved ones are cared for according to your wishes. While it might seem overwhelming, taking the time to establish a well-thought-out plan can provide peace of mind for you and those you care about most.
In this blog, we’ll explore the top 5 estate planning strategies that can help you safeguard your future and minimize taxes. We’ll also share several tips to make the process as smooth as possible for yourself and your heirs. Whether you’re just starting or looking to fine-tune an existing plan, these strategies and best practices can be game-changers.
Estate Planning Strategies: 5 Methods to Consider to Save Money & Reduce Taxes
Leaving behind your family upon death isn’t just challenging for them emotionally, but it can also become a financial hardship. To save yourself and your loved ones money and stress in the long run, here are 5 estate planning strategies to implement as you prepare for the inevitable:
1. Grantor Retained Annuity Trust
Grantor Retained Annuity Trusts, or “GRATs,” are an estate planning strategy that involves transferring the appreciation of high-growth investments or business properties to a trust for a specific number of years.
In a GRAT transaction, assets are placed in an irrevocable trust for an annuity or fixed dollar amount to the grantor for a certain period. The beneficiary must be a taxpayer in order for this to qualify. When the term finishes, any property still in the trust passes to the family free of gift or estate tax. For this to happen, the GRAT has to be structured so that the subtotal value given to the trust is priced at zero.
2. Spousal Lifetime Access Trust
A Spousal Lifetime Access Trust (SLAT) is a financial estate planning strategy that allows you to leverage high federal estate tax exemptions. In a SLAT, one spouse contributes a lifetime gift of assets to an irrevocable trust, and the other spouse becomes the beneficiary. Transferring assets to a SLAT will use up a portion of your federal estate tax exemption. At the same time, the spouse who’s the beneficiary will have access to the assets in the trust during their lifetime. Once both spouses have passed away, any leftover assets are transferred to the children’s trusts. The good news is that any assets in the SLAT and their appreciation will not be subject to estate taxes, saving you excess money.
3. Annual Gifting
Over one year, a person can transfer a given amount (currently $18,000) to another individual without reporting it to the IRS and being taxed. The yearly gift tax exclusion amount is allowed per recipient, meaning spouses could both give $18,000 for a total of $36,000 without incurring gift tax. Taking advantage of annual gifting can significantly reduce the size of your taxable estate, so leveraging this strategy is essential to save money on taxes during your lifetime and after death.
4. Charitable Remainder Trust
Another irrevocable trust you should consider is a Charitable Remainder Trust, or “CRT.” This trust offers a steady income stream from illiquid assets to the grantor or non-charitable beneficiaries for a specific time. After the time has been allotted, the trust assets are distributed to one or more select charities. Once you’ve funded the trust, you can take a charitable income tax deduction.
Here are a few benefits of having a CRT:
- The CRT is a charitable entity, which means it isn’t taxable to the grantor
- Assets placed in the CRT are excluded from your federally taxable estate
- CRT allows you to transform the sale of an appreciated asset (which could gain a significant profit in a single year) into an income stream that easily offsets the capital losses
5. Irrevocable Life Insurance Trust
Irrevocable Life Insurance Trusts (ILITs) are an estate planning strategy that can protect life insurance death benefits from federal estate tax. ILITs are irrevocable trusts that, when put together strategically, allow proceeds of policies insuring your life to bypass federal taxable estate after you’ve passed. This strategy will enable you to purchase life insurance independently and gift the ILIT money needed for premiums. After your death, your policy’s benefits will be paid to the ILIT and won’t be taxable.
Additionally, any benefits of the ILIT will receive tax-free money from the life insurance policy. You can appoint one or numerous beneficiaries of the ILIT to receive the life insurance payout.
5 Insider Tips for Seamless Estate Planning
In addition to the strategies listed above, here are 5 tips for a more straightforward estate planning process:
1. Prepare for long-term care.
Many people think about long-term care too late, putting their families in tough positions to make end-of-life decisions on their behalf. However, you can make the end of your life easy and peaceful for yourself and your loved ones by preparing ahead of time.
When preparing for long-term care, consider the following:
- Appoint a durable power of attorney (POA) to make monumental healthcare decisions if you cannot. Who do you trust to make end-of-life decisions for you? Your durable power of attorney will determine things like when you go to a nursing home, how your end-of-life care looks like, and other important decisions. Appoint a durable power of attorney that you trust to properly follow your wishes and ensure a proper legacy is left behind.
- Research long-term care options and communicate your preference to your POA and family members. Consider how you’d like the end of your life to look like, whether that’s being in an assisted living space or having at-home care for as long as possible. During this time, consider your current health conditions and different scenarios you could encounter. Planning ahead in this area prevents your family from disputing about how you’ll be taken care of near the end of your life.
- Establish a will and trust to ensure your assets are managed and handled according to your wishes during your life and after death. Protecting your family and assets is a top priority at the end of your lifetime. Designating beneficiaries and ensuring your possessions and wealth are handled according to your intentions is possible by planning ahead. Work with a professional estate planning attorney to create a legally binding will and trust, ensuring peace of mind for the end of your life.
2. Avoid the risk of probate.
Probate is the lengthy and complicated legal process of verifying the legitimacy of your will in court. Not only is probate costly and can quickly devalue your estate, but it can also take years to conclude, depending on various circumstances. Additionally, probate is very public, meaning anyone can find documentation about your assets and wealth, including any outstanding debts and the names of your beneficiaries. Fortunately, probate is avoidable with the right plan of action.
Estate planning strategies like writing and updating a will, appointing an executor over your estate, and naming a trustee to handle your assets in a trust can reduce the possibility of probate.
Check out this article to start your estate planning process and bypass the risk of probate.
3. Plan for federal and state estate taxes.
Estate taxes are federal taxes on your assets, including cash, real estate, stocks, and other things of value. Your beneficiaries will be required to pay estate taxes after they’ve received their inheritance, often within 9 months of your passing.
As mentioned above, there are estate planning strategies you can implement to reduce taxes, but it’s best to consult with a tax professional while preparing for the future. Tax professionals will often work with your attorney to decide which course of action best suits your circumstances, ensuring you pay the least estate taxes possible.
4. Keep your estate plan updated.
Sometimes, life happens, and it changes who your beneficiaries will be or how you’d like the end of your life to look. It’s essential to keep your estate plan updated and make proper changes to your will or trust in the event of a massive life event, such as a divorce or death in the family. Furthermore, if there are changes to your financial situation, like the addition of a new high-value asset or paid-off debt, it’s crucial to make necessary changes to your estate plan as needed.
It’s recommended that you update your estate plan every 3–5 years, ensuring that the names of the beneficiaries and those appointed to various roles are accurate and that your wishes are correctly followed.
5. Work with a professional.
While DIY estate planning is possible, it often involves headaches, complexities, and countless questions you may need answers to. Hiring a professional estate planning attorney ensures you feel 100% supported during the planning process, and you leave behind a solid foundation for your loved ones to build upon. Working with a lawyer means you’re gaining the help of a compassionate professional dedicated to ensuring your loved ones are cared for and will organize your estate plan in a way that makes sense to you. They often bring decades of experience, making the estate planning process easy to understand and seamless for you and those you care about most.
If you’re looking for an estate planning attorney in Northern Utah, look no further than Kelly Cardon Law. We specialize in establishing wills, drafting trusts, and making certain your assets and loved ones are protected during your life and after death. Don’t try to plan on your own—contact us to gain the hands-on support you need to start creating an estate plan that aligns with your wishes.