Effective estate planning can help you to minimize or completely avoid the federal estate tax, sometimes referred to as the “death tax”. California presently does not have a state estate tax. Some professionals call the estate tax a “voluntary” tax because you only volunteer to pay it if you don’t sufficiently plan.
You can avoid estate tax by:
- Creating a life insurance trust (ILIT) to own life insurance policies on your life. If you don’t own it, it’s not taxed at your death.
- Gifting $17,000 (starting in 2023) to as many individuals each calendar year as you would like. The amount may change in later years.
- Paying tuition costs for as many individuals as you would like so long as it’s paid directly to the school.
- Paying medical costs for as many individuals as you would like so long as they’re paid directly to the medical provider.
- Gifting using your lifetime unified credit exemption which will be $12.92 million in 2023, but, under current law, may vary in later years. When gifting large amounts, consider giving into a trust and not directly to the beneficiary.
- Passing your assets to your spouse or to a trust for the benefit of your spouse.
- Leaving assets to the charity of your choice or creating your own charity or private foundation.
- Using a qualified personal residence trust (QPRT) to get the value of up to two houses out of your estate.
- Using a series of grantor retained annuity trusts (GRATs) to get assets out of your estate.
- Using a family limited partnership to reduce the value of assets for gifting purposes.
- Using charitable trusts such as the charitable remainder trust (CRT) and charitable lead trusts (CLT) which benefits a charity, provides an income stream for your family, and lessens your income tax by creating a four tiered income stream and providing a tax deduction on the value of the gift going to charity.
There are numerous advance planning strategies which must be carefully implemented. Working with an experienced and qualified estate planning attorney is the best place to start.
Timothy P. Murphy is an estate planning and elder law attorney whose practice emphasizes helping people to build, preserve and pass on their wealth. He works with his clients to accomplish their goals while avoiding unnecessary court proceedings and minimizing or eliminating exposure to death taxes.
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