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Estate Planning: Minimizing Your Estate’s Tax Burden Thumbnail

Estate Planning: Minimizing Your Estate’s Tax Burden

The idea of estate planning has always been shrouded with gloom as it is associated with death. Some are uncomfortable talking about, it while some don’t see the need to worry about it before they grow old. 

However, death is unpredictable so it is important to plan as early as possible for the sake of your children and other loved ones. Although the law, by default, can dictate the fate of your estate, there’s a chance that you may not like it and it may not go according to what you had envisioned.

Through estate planning, you get to exercise control over your assets and answer for your liabilities, even after death. Aside from that, you can:

  • Dictate the guardianship of your minor children;
  • Designate an executor;
  •  Establish who can make medical decisions on your behalf when you become unable to do so yourself;
  • Request orders such as Do Not Resuscitate (DNR) and Do Not Intubate;
  • Appoint someone to handle your financial affairs;
  • Identify how your debts and taxes will be paid, and more.

One of the important facets of estate planning is your taxes. Without tax planning, your estate may end up paying more taxes than what passes on to your heirs.

First Things First: What taxes should you look out for in estate planning?

Estate Tax

The federal estate tax imposes a burden on the privilege to transfer your property upon death. 

The graduated tax rate ranges from 18% to 40%, depending on the amount that goes over the federal exemption limit. 

With the new inflation-adjusted numbers from the Internal Revenue Services, you can now pass on as much as $12.06 million worth of assets to your heirs, without having to pay the estate tax.

Gift Tax

Choosing to donate some of your properties during your lifetime may trigger the gift tax, also ranging from 18% to 40% tax rate, which is applied to the value exceeding $16,000 per donee annually.

Aside from gifts valued not exceeding the annual exclusion amount, there are other donations that can be excluded from the tax like gifts to your spouse.

Please take note that yearly exclusions from the gift tax is deducted from the $12.06 million federal exemption limit. To illustrate, if you’ve donated $16,000 each to your ten children, then upon your death, $160,000 will be subtracted from the federal exemption limit, which leaves you with only $11.9 million as exemption from your estate tax.

Generation-Skipping Transfer (GST) Tax

A GST tax kicks in if you skip a generation and make donations directly to your grandchildren, to relatives who are at least two generations younger than you, or to anyone outside your family who’s 37 ½ years your junior. 

Inheritance Tax

Some states like Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania have inheritance tax, which, in contrast to estate tax, is imposed on the one who inherits.

Strategies to Minimize Your Estate’s Tax Burden

The very essence of estate planning is ensuring that your loved ones are in the best possible situation, even after your death. Thus, employing strategies to minimize your estate’s tax liability is necessary.

Investing in Retirement Plan — Estate Planning

Do you have a 401(k) or a traditional IRA? If so, you will receive income from both after age 72. However, if you have saved and invested much of your life, you may also end up retiring at a higher marginal tax rate than your current one. In fact, the income resulting from a required minimum distribution alone could push you into a higher tax bracket.

What’s a pre-tax investment?

Traditional IRAs and 401(k)s are examples of pre-tax investments. You can put off paying taxes on the contributions you make to these accounts until you start to take distributions. When you take distributions from these accounts, you may owe taxes on the withdrawal. Pre-tax investments are also called tax-deferred investments, as the invested assets can benefit from tax-deferred growth.

Under the SECURE Act, once you reach age 72, you must begin taking required minimum distributions from traditional IRAs, 401(k)s, and other defined contribution plans in most circumstances. Withdrawals are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Contributions to a traditional IRA may be fully or partially deductible, depending on your adjusted gross income.

What's an after-tax investment?

A Roth IRA is a classic example. When you put money into a Roth IRA, the contribution is made with after-tax dollars. As a trade-off, you may not owe taxes on the withdrawals from that Roth IRA (so long as you have had your Roth IRA at least five years and you are at least 59½ years old). With distributions from a Roth IRA, your total taxable retirement income is not as high as it would be otherwise.

Should you have both a traditional IRA and a Roth IRA?

It may seem redundant, but it could help you manage your tax situation. Keep in mind that tax-free and penalty-free withdrawals from a Roth IRA can also be taken under certain other circumstances, such as the owner's death.

Organized A Family Limited Partnership

A family limited partnership (FLP) is a business wherein two or more family members agree to contribute money or property to a common fund. It is often established for the preservation of generational wealth.

Assets pooled into an FLP leave your estate so future return, interests, and profits earned from them are excluded from estate tax.

However, the downside is that it can be expensive to establish and manage an FLP.

Make A Charitable Contributions

Making gifts of shares may be a good tax strategy for you. Why sell shares when you can gift them? If you have appreciated stocks in your portfolio, you may want to consider donating those shares to charity rather than selling them.

Donating appreciated securities to a tax-exempt charity may allow you to manage your taxes and benefit the charity. If you have held the stock for more than a year, you may be able to deduct the fair market value of the stock from your taxes in the year that you donate. If the charity is tax-exempt, it may not face capital gains tax on the stock if it sells it in the future.1

When is donating stock a better choice than gifting cash or just selling the shares? There are several reasons to consider donating highly appreciated stock to a tax-exempt charity. For example, you may own company stock and have the opportunity to donate some shares. There are also potential tax benefits to consider if you donate appreciated securities that you have owned for at least one year.

If you sell shares of appreciated stock from a taxable account and subsequently donate the proceeds from the sale to charity, you may face capital gains tax on any potential gain you realize, which effectively trims the tax benefit of cash donation.

When is donating cash a choice to consider?

If you donate shares of depreciated stock from a taxable account to a charity, you can only deduct their current value, not the value they had when you originally bought them.

Remember the tax rules for charitable donations.

If you donate appreciated stock to a charity, you may want to review IRS Publication 526, Charitable Contributions. Double-check to see that the charity has non-profit status under federal tax law and be sure to record the deduction on a Schedule A that you attach to your 1040.

If your contribution totals $250 or more, the donation(s) must be recorded; that is, the charity needs to give you a written statement describing the donation and its value and whether it is providing you with goods or services in exchange for it. A bank record or even payroll deduction record can also denote the contribution.

Gifting cash or securities to an organization is a wonderful opportunity. But keep in mind that tax rules are constantly being adjusted, and there's a possibility that the current rules may change. Make certain that you consult your tax, legal, and accounting professionals before starting a new gifting strategy if you intend to use the gift as a tax deduction.

Qualified Personal Residence Trust

Funding a Qualified Personal Residence Trust (QPRT) will reduce the value of your estate as it effectively transfers your home’s ownership into a trust. 

With a QPRT, you can continue living in your home rent-free, freeze its market value, and reduce the size of your estate. More importantly, your beneficiaries can take over the property once the term ends, without triggering the gift tax (except when you’ve exceeded the lifetime exemption limit).

However, it’s important to set it up as early as possible because if you die before the term ends, your personal residence will still be included in the computation of your gross estate.

Avoiding Tax Scam

Year after year, criminals try to scam certain taxpayers. And year after year, certain taxpayers resort to schemes in an effort to put one over on the Internal Revenue Service (IRS). These cons occur year-round, not just during tax season. In response to their frequency, the IRS has listed the 12 biggest offenses—scams that you should recognize and schemes that warrant penalties and/or punishment.


If you get an unsolicited email claiming to be from the IRS, it is a scam. The IRS never reaches out via email, regardless of the situation. If such an email lands in your inbox, forward it to phishing@irs.gov. You should also be careful when sending personal information, including payroll or other financial information, via an email or website.

Phone scams

Each year, criminals call taxpayers and allege that said taxpayers owe money to the IRS. Visual tricks can lend authenticity to the ruse. For example, the caller ID may show a toll-free number. The caller may mention a phony IRS employee badge number. New spins are constantly emerging, including threats of arrest and even deportation.

Identity theft

The IRS warns that identity theft is a constant concern—and not just online. Thieves can steal your mail or rifle through your trash. While the IRS has made headway in terms of identifying such scams when related to tax returns and plays an active role in identifying lawbreakers, the best defense is to be cautious with your identity and information.

Return preparer fraud

Among the many honest professionals, there are also some con artists out there who aim to rip off personal information and grab phantom refunds, so be careful when selecting who prepares your tax returns.

Fake charities

Some taxpayers claim that they are gathering funds for hurricane victims, an overseas relief effort, an outreach ministry, and so on. Be on the lookout for organizations that use phony names to appear as legitimate charities. A specious charity may ask you for cash donations and/or your Social Security number and banking information before offering a receipt.

Inflated refund claims

In this scenario, the scammers do prepare and file 1040s, but they charge big fees up front or claim an exorbitant portion of your refund. The IRS specifically warns against signing a blank return and trusting preparers who charge based on the amount of your tax refund.

Making the right decisions today will impact the extent of control you can exercise over the future of your assets, and will ensure that your loved ones will get the most of what you’ve worked hard for during your lifetime. Talking to a financial advisor you can trust will help you navigate this process and maximize available tax reliefs.

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  1. How To Donate Stock To Charity In 2022

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your financial advisor, attorney, or tax advisor.  For additional information and disclosures, please visit our website at www.mbewealth.com.  MBE Wealth Management, LLC is a registered investment advisor.

Baylee Shifflet — Associate Financial Advisor

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.