Minimizing Estate Taxes: Strategies to Preserve Wealth for Future Generations

Gabriel Katzner - August 10, 2023 - Estate Planning
Minimizing Estate Taxes: Strategies to Preserve Wealth for Future Generations

Minimizing estate taxes requires careful planning and taking the time to consider multiple different strategies. Since estate tax laws vary by state, it is essential to consult with an estate attorney to determine the most suitable strategies for your particular circumstances.

Here are ten common strategies used to reduce estate taxes.

1. Charitable trusts and charitable transfers

Making charitable donations or creating charitable trusts during your lifetime can reduce your estate taxes by reducing the value of your estate. Charitable trusts allow you to donate to your favorite tax-exempt charitable organization or nonprofit, receive tax benefits, and retain the right to use your gifted asset or income until your death.

Examples of charitable trusts are charitable lead trusts and charitable remainder trusts. Charitable trusts are irrevocable, so you must be comfortable giving up control of these assets.

2. Family limited partnerships

If your family has business interests, you may choose to set up a family-owned holding company as a limited partnership or a limited liability company.

Family-limited partnerships can minimize income tax, provide a vehicle to transfer the business to the next generation and limit liability for family partners. The general partners (business owners) put assets into the partnership and can gift an interest or share of the partnership to second-class owners. These limited or passive business owners are typically children and grandchildren.

Interest in the business can be discounted from 15% to 30% in value because the share cannot be sold to anyone outside the family and therefore lacks market value. The discount can reduce federal estate taxes.

Assets in family-limited partnerships are protected. Each partner pays income tax on their share of the business income. Growth in the business asset value is protected from inheritance and estate taxes.

3. Gifting to minors

Gifting to a dependent child is exempt under the gift tax exclusion limit. This applies to children under the age of 18 or 21, depending on the state.

Two ways to gift a minor without gift tax consequences include:

  • The Uniform Transfers to Minors Act (UTMA): Allows gifts of cash or securities to be given to minors without the aid of a guardian or trustee. Money, patents, royalties, real estate, and fine art can be gifted. The gift giver or custodian can manage the assets until the child is an adult. The Internal Revenue Service allows for an exclusion of the gift tax of up to $17,000 for 2023. This act allows for a broader range of gifts than the UGMA.
  • The Uniform Gifts to Minor Act (UGMA): Allows minor children to be gifted with money or real property without the need for a formal trust. Gifts are made using after-tax dollars, so the donor does not receive a tax deduction. The Internal Revenue Service allows for an exclusion of the gift tax of up to $17,000 for 2023.

One potential drawback to gifting to minors is that it may impact your child’s ability to qualify for educational financial aid.

4. Irrevocable life insurance trusts

An irrevocable life insurance trust (ILIT) enables a grantor to purchase life insurance, transfer the ownership of the life insurance policies to the ILIT trust, and thus remove the life insurance proceeds from the grantor’s taxable estate.

Funds transferred into the ILIT can be used to pay the life insurance premiums up to the annual gift tax exclusion amount.

Upon their death, the death benefits from the life insurance policy are paid to the trust’s beneficiaries.

5. Lifetime gifts to children and grandchildren

Gift-giving to children and grandchildren during your lifetime enables you to reduce the size of your taxable estate by giving annual gifts up to the federally determined gift exclusion limit. You can give these financial gifts without incurring a gift tax by staying under this limit.

For 2023, the annual gift tax exemption is $17,000. The annual gift exclusion limit applies on a per-recipient basis. If you are married, you and your spouse can each gift $17,000 to each recipient. If you gift more than $17,000 to one recipient in a single year, you will need to disclose these gifts to the Internal Revenue Service and potentially pay gift taxes, which range from 18% to 40%. You won’t have to pay taxes if you have not reached the lifetime gift tax limit.

In addition to an annual gift limit, there are also lifetime gift tax limits. In 2023, the lifetime gift tax exemption is $12.92 million.

The IRS defines a gift as “any transfer to an individual, either directly or indirectly, where full consideration is not received in return.”

The estate tax exemption for 2023 is $12.92 million. This $12.92 million is a cumulative exemption for both gifts and estate taxes. If you have reached the threshold by gifting over your lifetime, you will need to pay estate taxes. One way to reduce your estate taxes is to gift your assets in annual increments of $17,000 or less per recipient.

6. Marital transfers

As long as your spouse is a U.S. citizen, you can make gifts to them throughout your lifetime and upon your death, and they are not subject to estate taxes.

When your spouse dies, the entire taxable estate, including assets transferred from the decedent spouse, is subject to estate taxes.

Marital transfers delay, but do not eliminate, estate taxes.

7. Marital trusts

Two types of marital trusts, A.B. trusts, and QTIP trusts, allow spouses to use their full $12.06 million exemption to the fullest possible extent without disadvantaging the surviving spouse.

An AB trust is a joint trust that is designed to minimize estate taxes. Upon one spouse’s death, the trust splits into the survivor portion (A or marital trust, the surviving spouse has access to the income generated by the trust and may have access to the principal) and the bypass portion (B or bypass trust, a sum equal to the current lifetime exemption is placed in the B trust to benefit the beneficiaries).

A Qualified Terminable Interest Property (QTIP) trust provides for the surviving spouse without giving them control over the trust’s assets. The grantor determines how the trust assets will pass to the beneficiaries.

8. Private annuities

Private annuities are a type of agreement between the asset owner and another party, usually a younger family member. The assets owner reduces estate and gift taxes by transferring ownership of the asset to another family member. In exchange, they receive an annual income for life from the asset recipient.

After the property is transferred, the property’s value and all future appreciation are removed from the asset owner’s taxable estate.

Private annuities are commonly utilized within a private annuity trust scenario.

9. Qualified personal residence trusts

A qualified personal residence trust (QPRT) is an irrevocable trust that allows homeowners to put their home in a trust and continue living in the home for a set number of years.

Since the home is in trust, if it increases in value, the capital gains are tax free. The owner is only required to pay gift tax on the home’s value when it was placed in the trust. The home’s value is typically lower on the real estate market because the grantor can legally reside in it for a set number of years.

If the homeowner dies before the trust’s term ends, the beneficiaries will not realize any tax benefits.

10. Special use real estate evaluation

Real estate property is valued based on its fair market value on the date of the owner’s death. This is based on its highest and best use. If you have a farm or other certain real estate, you can make a special election to have this special-use property valued at a lower rate based on its actual use.

To qualify for this election, the owner must have been a U.S. citizen or resident upon their death. The farm or property must be located in the U.S. and used by the decedent for business or trade activity.

We welcome you to schedule a call with us or reach us directly at 855.631.3457 to learn more about how best to plan today to protect those most important to you.

Gabriel Katzner

In 2002, Gabriel Katzner, the founding partner of Katzner Law Group received his Juris Doctorate with honors from the Fordham University School of Law. After spending the first 7 years of his legal career
practicing at Cahill Gordon & Reindel LLP, an international law firm based in New York, he went on to found his own firm.

Gabriel Katzner has a track record, along with a vast number of
outstanding public reviews across platforms, of working hard on behalf of individuals who need assistance with comprehensive
estate planning services. Finding a lawyer who is knowledgeable about revocable and irrevocable trust planning, guardianship for minor children, asset protection, trust administration and probate,
as well as Medi-Cal / Medicaid planning is extremely important.

Years of experience: More than 17 years
Location: San Diego, CA



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This page has been written, edited, and reviewed by a team of legal writers following our comprehensive editorial guidelines. Furthermore, it has received approval from attorney Gabriel Katzner, an experienced estate planning lawyer with over 17 years of legal expertise.

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