Putting your assets into a trust means they no longer belong to you and, therefore, aren’t subject to estate tax. You can appoint yourself as trustee of this fund while you’re alive, ensuring you can access your assets and distribute the money as you see fit. You can then will the trust to an heir when you pass away.
Trusts are used to manage estate taxes, shelter assets from creditors and pass on wealth to future generations. A family trust is a specific type of trust that families can use to create a financial legacy for years to come. There are several benefits to creating one, including ensuring your family members receive your wealth and avoiding public disclosure of trust assets. However, not every family necessarily needs a family trust, as there are other options too.
An estate tax is most notably levied at the federal level, and it’s charged to a decedent’s estate when their assets pass on to their beneficiaries. Most estates won’t trigger the federal estate tax though, as it only applies to estates worth $12.92 million ($25.84 million for couples) in 2023, minus any applicable gifts. Because this tax can have a significant effect on your beneficiaries, it’s best to plan ahead for it in your estate plan if you think your estate may trigger it.
There is still the question of how much your heirs can inherit without paying taxes, and the reality is that it depends. There are some steps you can take to minimize taxes, though, giving your heirs an advantage:
Gift Your Money
Start by gifting your heirs money every year. The annual exclusion amount for 2023 is $17,000 ($34,000 per married couple).
Convert Retirement Accounts to Roth Accounts
Your heirs will have to pay tax on any retirement benefits they inherit if they’re in a 401(k) or IRA. Have heirs use gifts to create and add to Roth IRA or Roth 401(k).
Life Insurance
A good life insurance plan can set your heirs up in the future. Indexed Universal Life (IUL) = Tax-Free Investment for your heirs.
Annuities with a Death Benefit
Annuities with a death benefit provide a lump sum payout for your beneficiary.
Real Estate
Real estate will likely be one of the most significant non-liquid assets you pass to your heirs. Capital gains tax applies to real estate, but only on gains the property makes after the beneficiary inherits it.
Investment Accounts
Your investment accounts can provide tax breaks for your heirs. Investments are similar to real estate because your beneficiaries are only on the hook for taxes on the gains those investments make after they inherit them.
