Estate planning not only ensures the timely distribution of assets but also can provide a legacy that spans generations. In this article, we will discuss the benefits of estate planning, including strategies to mitigate estate taxes and preserve your hard-earned wealth for the future.
Crafting an Estate Plan: Preserving Wealth for Future Generations
Generational wealth isn’t just about money; it can include the values, principles, and opportunities you wish to pass on to your family. An estate plan involves several essential components:
- Will and Testament: A will is the cornerstone of any estate plan. It specifies how your assets will be distributed, guardianship for minor children, and even designates an executor to ensure your wishes are carried out.
- Trusts: Trusts provide a flexible and efficient means of managing and distributing assets. Irrevocable trusts can help protect assets from creditors and ensure the smooth transfer of wealth, while revocable living trusts allow assets to bypass probate.
- Power of Attorney and Healthcare Directives: These documents will designate someone to make financial and healthcare decisions on your behalf if you become incapacitated.
- Guardianship Provisions: For families with minor children, naming guardians can be tricky. Do you elect your parents, who could be aging and not have the physical stamina to take care of your young kids? Or do you elect one of your siblings, who could have multiple kids themselves and could struggle to manage your kids on top of theirs. There is no right answer but it’s important to have these discussions with your loved ones.
- Charitable Giving: Giving is about helping the causes you care about but also provides potential tax benefits.
Mitigating Estate Taxes: Strategies to Minimize Tax Impact
Estate taxes are expensive. Your money is going to go somewhere when you pass away. You can have no plan and let the government get most of it or implement some strategies today to mitigate the tax impact. Consider the following:
- Gift and Generation-Skipping Transfer (GST) Tax: Gifting assets during your lifetime can reduce the value of your estate subject to taxation. The GST tax exemption allows you to transfer assets to grandchildren or future generations with reduced tax consequences.
- Irrevocable Life Insurance Trust (ILIT): Placing life insurance policies in an ILIT can remove their value from your taxable estate while providing a source of liquidity to cover estate taxes.
- Qualified Personal Residence Trust (QPRT): This trust allows you to transfer your primary residence or vacation home to beneficiaries while retaining the right to live in it for a specified period. This reduces the value of the property subject to estate taxes.
- Charitable Trusts: Charitable remainder trusts and charitable lead trusts allow you to support charitable causes while potentially reducing estate taxes.
Estate Tax Exemption and the 2026 Sunset
Keep in mind that some of the strategies above may or may not apply given your circumstances. Something to keep in mind is the current estate tax exemption and what the estate tax exemption is likely to change to in 2026.
The current estate tax exemption for 2023 is $12.92 million for singles and $25.84 million for married couples. The inflation adjusted exemption is expected to be $7million for singles and $14million for married couples in 2026.
In addition, the current maximum estate tax rate is 40% and is expected to increase to a maximum rate of 45% in 2026.
What does this mean? The estate tax exemption means that you do not pay any estate taxes when inheriting assets IF you are inheriting less than the current exemption amount. Anything over the exemption has the potential to be taxed at a maximum rate of 40% today.
Conclusion: Estate planning for generational wealth can make sure that your hard-earned money ends up in the hands of your loved ones, not the government.
Given the upcoming potential changes in the estate tax exemption, careful estate planning today can help mitigate the tax burden you could incur when the exemption is essentially cut in half.
Speak with an experienced estate planning professional. It is a complicated subject, and a professional has the potential to help you make sure your family is taken care of if you are no longer here.
For a comprehensive review of your personal situation, always consult with a tax or legal advisor.
