Throughout a lifetime, one usually creates and acquires assets. During this accumulation phase, one should develop a strategy for maintaining these assets and not jeopardize an unplanned liquidation through a lack of preparation. Additionally, the services of a good accountant can assist in protecting these assets using sound accounting principles.
It is wise to initiate Estate, Trust, and Gift Tax Planning during this accumulation process. While each has its own rules and guidelines, utilizing each reduces tremendous stress and concern during the owner’s life and after their demise. The goal is to ensure that all of your assets end up in the hands of your loved ones.
Each tax planning strategy has a very complex set of rules and guidelines that require the assistance of a team of professionals to navigate.
Estate tax planning
Estate tax planning allows one to transfer assets and property with the minimization of taxable consequences. One way to accomplish this is by donating money throughout one’s life.
With a solid plan in place, you are assured that the future of your loved ones will be drama-free with little interruptions. At the same time, the plans will ensure that many of your wishes will be accomplished, including:
- Ensuring that your family is financially stable.
- Providing generational asset availability.
- Contributing to noteworthy causes like charities.
- Having the confidence that the transfer of all your assets will go as directed.
- Ensuring the minimization of overall expenses and tax consequences.
- Designating persons to enact your wishes upon your unfortunate demise.
Understanding Estate Taxes
According to the Internal Revenue Code for the tax year 2019, each taxpayer is allowed the federal estate tax exemption of $11.4 million. However, less than 1% of taxpayers in the United States pay this tax of any amount. If one has assets that exceed this amount, a series of strategies can help you avoid these tax consequences altogether.
There are a few ways to guard your estate, such as:
Gift giving
The most efficient way to maximize gift-giving is to share your wealth with loved ones. Currently, you can make multiple gifts for a maximum of $15,000 with no tax consequences in a taxable year. In addition, there is no cap on how many people you give gifts to. So, if your current estate is $10 million, you can steadily pass on your estate with no gift tax as long as you don’t exceed the $11.4 million Gax exemption.
In the case of a married couple, a donor can maximize gift giving by donating a gift to a spouse, who can also take advantage of the exemption and continue donating. In this case, they can split the gift on their annual tax return.
Trusts
Short-term Grantor Retained Annuity Trusts
This is one of the more common tax planning strategies, allowing one to shift value from an individual’s estate. In other words, it will enable you to transfer assets to an established irrevocable trust and make the gift nontaxable. The originator of the donation gains an annuity every year plus interest using the IRS’s interest rate.
Long-term Grantor Retained Annuity Trusts
This established trust is most utilized when the assets being transferred are income-producing and have an income that is much higher than a long-term rate. Remember, before transferring your business, it is best to evaluate the quality of your services and your customer base because this will influence the market value of your business; according to Savage Accountancy’s Blog, “What is a Business Valuation and Why You Need On?.?”
Qualified Personal Residence Trust
This type of trust allows a donor to donate his home to a trust while continuing to live in it for a specified number of years. Once these years have expired, the donor may continue with the option to resideonn the propert,. However, he must begin to pay the rent. Additionally, if the house is sold or destroyed and is not replaced, the trust turns into a Grantor Retained Annuity Trust.
Charitable Trusts
Generally speaking, this type of trust allows the interest to be transferred to a qualified charitable organization at the end of a specific amount of time. During one’s life, the donor receives a charitable income tax deduction for the value of whatever interest remains when it is given to the charity. The donor must secure an annuity of at least 5% for a term not to exceed 20 years ,with no additional contributions allowed to be made.
A Family Partnership
Analysts suggest that family partnerships are better for tax planning than closely held corporations due to their flexibility in terms of capital contributions and asset distribution.
It is recommended that business assets only be transferred to an established partnership. Courts have established precedence in allowing limited discounts for liquid assets in family-limited partnerships, like publicly traded stock. The overall objective of minimizing taxes is to ensure that transferred partnership interests are not included in the estate of the person doing the transfer.
Use accounting strategies to assess your needs
- Determine your goals and objectives.
- Evaluate all assets, business and personal.
- Take advantage of all qualified business deductions.
- Familiarize yourself with the terminology of estate, gifts, and trusts.
While tax planning is complicated, maximizing your tax benefits and minimizing your tax consequences requires a lot of planning, patience, and execution. To provide your family and yourself with peace of mind, it is best to contact a qualified professional to navigate these uncharted waters.