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5 Tips For Tax-efficient Estate Planning

Because of administration changes, government gridlock, and electoral politics, we may be looking at some of the most complex challenges ever in tax-efficient wealth transfer. This is particularly true for families with substantial estates who are looking for ways to achieve tax-efficient estate planning. 

Consequently, 2022 looks to be a year where the services of an experienced evidence-based tax advisor and certified wealth manager should be an essential, almost mandatory, key to your estate and investment planning.


Tax policies for estate planning

The most important modifications to your tax and estate planning involve the changes that were made in the 2017 Tax Cut and Jobs Act (TCJA). This resulted in a doubling of exemptions on lifetime gift, estate, and generation-skipping tax exemptions. The uncertainty of future tax codes results from forces in Congress who want to lower exemptions and raise tax rates. At this writing, most of the changes that were originally contained in the recently-passed Inflation Reduction Act will increase corporate taxes but not affect the family exemptions passed in the TCJA. However, the TCJA will end in 2025, and you should be prepared for changes following the national elections in 2022 and 2024.

This is a warning of trouble tomorrow and not something to be overly concerned about today. Most of the changes in tax law in the near future are going to be positive for wealthy taxpayers, but extensive planning with an advisor is still strongly suggested in order to ensure that your family’s position is protected in future years. For one thing, you may need to review existing trusts and tax plans and consider changing them under the TCJA. An evidence-based financial advisor is the best choice to track the almost-daily changes that occur as Congress brawls over the Tax Code.

Currently, the estate and gift tax exemption has been raised to $12.06 million per individual in 2022, and the amount per recipient is raised to $16,000. Inheritance tax is 40% on the largest estates, so gifting assets is crucial for keeping family wealth in the family. Members of Congress have suggested halving these exclusions in the future, so it would be wise to use them now.

Oh, just in case you thought you had it all figured out; at this point, 17 states and the District of Columbia levy their own estate taxes.

So, with these important warnings of imminent estate planning tax chaos ahead, here are some of the ways you can maximize your wealth and minimize your taxes.


1. Annual And Lifetime Exclusion Gifts

You and your spouse are now able to gift $16,000 to each recipient ($32,000 for married couples.) The IRS has stated that these amounts will not be reduced before 2025, and current gifts will not be affected by future tax law changes. 

The lifetime estate and gift exclusion in 2021 is $12.06 million per person, but there are indications that this may change in future years, so deciding on and making gifts is imperative. For example, the exclusion is set to be halved in 2026.

Since lifetime direct gifts are not taxed and the amount gifted does not count against the value of the estate, numerous advisors recommend making as many as possible.

2. Trusts

A trust is a time-honored method of giving assets to family members without completely losing control to beneficiaries who, because of youth, may not have the wisdom to protect these assets wisely. 

a. Funded Crummey Trusts

Crummey Trusts allow the donor to keep some control over the assets until the beneficiary reaches a certain age. 

b. IRC Section 2503 (c) Trusts

Gifted assets are transferred to a professional manager who controls distributions until the beneficiary reaches 21 years of age.

c. Uniform Transfers to Minors Act (UTMA)

Assets are placed in the care of a custodian to be used for a minor’s benefit until the beneficiary reaches 21 years of age.

d. Generation-skipping Trust (GST)

This trust gives no assets to your children but holds them for the benefit of your grandchildren. However, the potential tax on a GST has changed dramatically over the years.

e. Intentionally Defective Grantor Trust (IDGT)

An IDGT is an irrevocable trust that is not taxable to the donor, but the tax on any increase in value is included in the grantor’s regular 1040 and is tax-free to the intended beneficiary.

f. Limited Partnerships

The value of a share in a limited partnership can be placed in a trust and should not be forgotten when planning for estate taxes. Since the 40% overall estate tax will not be assessed on an LLP in an IDGT, the amount of increase is tax-free.

3. Education Funding

If you pay the institution directly, any education costs are tax-free and can be pre-paid. The alternative is to create a Section 529 Education Savings Plan where you can invest five years of contributions tax-free for the costs of education. 

4. Medical Expenses

Once again, if you pay the medical institution directly, any donation to cover medical expenses is tax-free. 

5. Charitable Donations

Cash and other assets given to a qualifying charitable organization are non-taxable. This may be applicable to your current year’s taxes. Major charities will accept donations of stock and real estate, sheltering you from capital gains taxes.


Create a tax-efficient estate plan today

There are many other types of trusts with differing aims: allowing an elderly couple to continue to live in their home, ensuring that a surviving spouse has a lifetime income, and guaranteeing that the grantors receive an income until they pass away are only a few of the possibilities. This is yet another good reason to create a comprehensive estate plan. This should include:

  • a will or a revocable living trust, 
  • a durable power of attorney, 
  • a healthcare directive, 
  • and a living will.

Competent and trusted attorneys and financial advisors are essential to creating these documents so that inadvertent errors or future Tax Code changes won’t affect your careful tax-efficient estate planning. Learn more about estate planning and talk to one of our wealth management experts. Set up a call →