How to Minimize Estate Taxes: Strategies and Tips

Nobody enjoys paying taxes, and it’s even worse knowing that after you pass away, even your estate will be taxed. We’re not saying that all taxes are bad. After all, they fund essential public services, such as schools, libraries, and infrastructures. But considering we are taxed on everything we earn and buy, it’s natural that everyone looks for ways to lower their tax bill.

Fortunately, there are several ways to minimize your estate taxes, ensuring that more wealth is passed on to your loved ones.

What are Estate Taxes?

Estate taxes are levied on your assets, including your property, cash, and investments before they are transferred to your heirs. Estate taxes differ from inheritance taxes, which the beneficiaries pay on the assets they receive.

California doesn’t have an estate tax; however, the federal government taxes everything above $13.99 million per individual. But, that exemption is set to expire at the end of 2025, and unless it’s extended, it will fall back to $7 million.

Marital Transfer

Married couples benefit from an unlimited marital deduction. When assets are transferred to the surviving spouse through a will or joint ownership, they are not subject to estate taxes at that time. However, a potential downside is that these assets become part of the surviving spouse’s estate, making them taxable upon their passing.

Gift versus Inheritance

Gifting allows you to transfer assets to loved ones while you’re alive. It could be money, personal property, or real estate. There are several advantages to this approach.

1. You can gift up to $19,000 per person annually without incurring a gift tax. This can significantly reduce your taxable estate.
2. Gifts of paying for someone’s tuition or medical expenses may be exempt from the gift tax.
3. You have the opportunity to help loved ones when they need it the most.
4. You can see the impact your gifts have on the recipients’ lives.

On the other hand, providing an inheritance means your beneficiaries won’t receive anything until after your death. You can retain control of your assets, which can be helpful in an unexpected financial crisis, like medical expenses. However, it doesn’t help minimize estate taxes.

Charitable Giving

Incorporating charitable gifts into your estate plan allows you to create a meaningful legacy and reduce your estate taxes. There are several methods to choose from:

Direct Donation

You can include a charity in your will to receive a percentage of your estate or specify particular assets, such as cash, stocks, or real estate. Any charitable donations are fully tax-deductible, thus reducing the amount of taxable estate.

Charitable Trusts

There are two main types of charitable trusts, both of which can reduce your taxable estate. A charitable remainder trust (CRT) places your assets into the trust and allows you or your beneficiaries to receive income from that trust for a specific term. Once the term ends, the remaining assets go to the charity.

Conversely, a charitable lead trust (CLT) allows the charity to receive income from the trust for some time, after which the remaining assets are passed on to your beneficiaries.

Special Use Real Estate Valuation

For families with farms or business properties, the Special Use Valuation allows the value of the real estate to be based on its current use at the time of the estate owner’s death rather than its higher market value. This lower valuation can help to lower the total taxable estate. This can be particularly helpful for families with ranches, orchards, groves, or wineries.

Discuss Your Estate Planning Goals with LPEP Law

There are several ways to minimize your estate taxes, and our attorneys at Lonich Patton Ehrlich Policastri can help you find the best ones for you. Our estate planning professionals will work with you and discuss various tax-saving strategies based on your current needs and goals. 

Schedule your free consultation by calling 408-553-0801. We will show you how a well-prepared estate plan can alleviate the burden of estate taxes and preserve more assets for your loved ones.

Disclaimer: this article does not constitute a guarantee, warranty, or prediction regarding the outcome of your legal matter.