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Virtually everyone needs a basic estate plan. A basic estate plan typically includes one or more health-care directives, a durable power of attorney, a will, and in some cases, a living trust. However, planning for the effect taxes can have on your estate and its transfer to your beneficiaries is just as important as the components of your estate plan. It is important to note that your estate will be taxed at both the federal and state level.
There are a number of strategies that may help you minimize estate taxes so that more of your money goes to your loved ones instead of the federal government. For example, if you want to leave a legacy to grandchildren or later generations, there are specific legal and tax issues that you'll need to consider (for example, the generation-skipping transfer tax). Similarly, If you own a family business or farm, you probably have unique planning concerns that may include transferring your business to your heirs in a way that doesn't disrupt operations, while taking advantage of special tax breaks. And if you're charitably inclined, there are strategies that help you arrange charitable gifts in a manner that best suits your financial situation.
Estate tax-minimizing strategies generally come with tradeoffs that you should be aware of. These tradeoffs can come in the form of, implementation costs, relinquishment of financial benefits, the loss of control of your assets to a certain degree.
Implementing any estate planning strategy usually comes with a cost. For instance, you may need to hire an attorney to draw up legal documents, or you may need to hire an appraiser to determine the current fair market value of a property. Second, most estate tax planning strategies require you to give up some or all of the financial benefits from your property. For example, putting life insurance in an irrevocable trust to avoid estate taxes on the proceeds also precludes you from drawing on the policy's cash value. Most of the tax-minimizing strategies we'll look at require you to give up some degree of control over your property. For example, deeding your home to your children today will avoid estate taxes on the home's future appreciation, but, as the new owners, your children would have the legal right to evict you.
The bottom line is that you must balance your objectives against the cost, making sure that the potential benefits of a strategy outweigh the costs. Now, let's look at some strategies that make the best use of the transfer tax exemptions, exclusions, and deductions.
Each of these strategies helps minimize transfer taxes while achieving specific objectives. Whether any of these strategies are appropriate for you depends upon your particular circumstances.
Some tax-minimizing strategies include:
If you have any concerns regarding the tax liability of your estate, reach out to us, we will provide clarity.