Estate Tax Planning: Leaving a Lasting Legacy for Your Loved Ones (Without Uncle Sam Taking a Big Bite)

Let’s face it: retirement is a time to enjoy the fruits of your labor. You’ve worked hard and saved diligently, and now you deserve to relax, travel, and spend quality time with loved ones. But have you considered what happens to your hard-earned nest egg after you’re gone? Estate planning might not be the most exciting topic, especially regarding inheritance tax considerations. Still, it’s a crucial step in ensuring your legacy goes where you want it to – straight to your loved ones, not Uncle Sam’s pocket.

Are You Subject to Inheritance Tax?

The good news is that the federal estate tax exemption is quite high in 2024, sitting at a generous $13.6 million per person (that’s $27.2 million for married couples!). So, chances are, your estate won’t be subject to this tax. However, there are a few things to keep in mind:

  • The Exemption Can Change

    This high exemption is set to expire at the end of 2025. It’s always best to plan for the future, and it’s possible the exemption could drop significantly in the coming years.  If it does expire at the end of 2025 and Congress does nothing, it will go back to its pre-TCJA levels of $5.6 million per individual, adjusted for inflation from 2017.

  • State Taxes Exist

    Some states have their own estate or inheritance taxes with lower thresholds. Be sure to research the specific rules in your state.

  • Your Estate Might Be Larger Than You Think

    Your house, retirement accounts, investments, and even life insurance policies all contribute to your estate’s value. Don’t underestimate how quickly these assets can add up.

Taking Action: Strategies for Tax-Efficient Estate Planning

Even if you think your estate falls below the current exemption, here are some strategies you can consider to minimize your tax burden and maximize your loved ones’ inheritance:

  • Review Your Retirement Accounts

    Traditional IRAs and 401(k)s are taxed upon withdrawal by your beneficiaries. Consider converting some or all of these accounts to Roth IRAs, where contributions are taxed upfront, but future withdrawals are tax-free (including for your beneficiaries).

  • Utilize Lifetime Gifting

    The IRS allows you to gift up to $18,000 per person annually (in 2024) without incurring any gift tax. This means that if you are married, both you and your spouse are entitled to that amount, giving you a total of $36,000 as a couple to gift in 2024.  The maximum amount is per recipient as well.  So, between the two of you, you could gift $36,000 to each person you choose.  For example, if you have children who are married, each of you could give $36,000 to each person in 2024, and if you have grandchildren, you could gift up to $36,000 to each of them in 2024. This is a great way to gradually transfer wealth to your heirs and reduce the overall size of your taxable estate.

  • Life Insurance Planning

    Life insurance can be an effective tool for mitigating estate tax costs.  Life insurance proceeds pass on income tax-free.  If your estate has the potential of triggering Federal or State estate taxes, then considering a life insurance policy to cover those anticipated taxes can be worth a look.  This type of planning was much more popular when estate tax thresholds were much lower in the past.  Remember, the high Federal exemption that is currently in place will expire in 2025 unless Congress keeps it at this level.

  • Work with a Financial Planner who is well-versed in taxation

    A qualified financial advisor who is also a tax advisor can help you create a comprehensive estate plan that considers your unique circumstances and minimizes your tax liability. They can also coordinate with your estate attorney on strategies like trusts and charitable giving, which can further maximize your legacy.

Taking the Next Step

By taking some proactive steps now, you can ensure your retirement savings and other assets go where you intend them to – to your loved ones, not the taxman. Here at East Coast Tax and Financial Planning, we’re passionate about helping retirees achieve their financial goals, including leaving a secure and tax-efficient legacy.

Ready to Reflect on Your Estate’s Tax Efficiency?

Schedule a complimentary consultation today. We’ll work with you to understand your specific situation and develop a personalized estate plan that minimizes your tax burden and maximizes your loved one’s inheritance.

Remember, planning for the future allows you to relax and enjoy your golden years with peace of mind, knowing your legacy is secure.

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