Many parents strive to take care of their children and loved ones in any way they can. A proper estate plan allows them to do so even after they pass away.
There are many ways wealth can be transferred in an estate plan. These transfer methods differ in a variety of ways, including in their potential estate tax impacts. For very large estates, there could be the potential for estate tax liability that could weigh heavily on an inheritance and decrease the funds the testator worked so hard to accumulate. Here are some of the wealth transfer methods that individuals with large estates could turn to try to reduce or eliminate such tax liability.
Life insurance trusts
An irrevocable life insurance trust is a one possible way to provide an inheritance to loved ones while protecting it. In such a trust, a life insurance policy and its future proceeds generally go into the trust, with the later distribution of the proceeds from the policy being controlled by the trust and the trustee. Generally, this makes it so the life insurance policy proceeds are considered separate from the estate for estate tax purposes, which can have estate tax benefits.
Life insurance policies and their proceeds are far from the only things that can be put into trusts. There are many types of trusts and all different sorts of assets can be put into them. Some types of trusts can help with the reduction or elimination of estate tax liability. Attorneys can provide individuals with guidance on what trusts could, and couldn’t, help them with their estate tax planning goals.
Another way individuals could provide funds to their loved ones is through gifting during their lifetime. People can gift up to $14,000 to an individual each year without being subject to gift taxes, and such gifts could help with reducing the size of an estate for estate tax purposes. In setting up and distributing these gifts, it is important to make sure they comply with all applicable laws and actually achieve the goals they are aimed at.
These are a few of the possible means for transferring an inheritance while reducing the possible effect of taxes. For further options and assistance in the process, it may be beneficial to consult with an attorney.