Many high net-worth clients are concerned about minimizing estate taxes. By employing strategic planning techniques, proper estate planning can minimize or even eliminate the burden of estate taxes, allowing more assets to pass to future generations. In this article, we’ll explore key strategies for reducing overall estate taxes.

Summary of the Estate Tax

The federal estate tax exemption amount for 2024 is $13.61 million per person and is adjusted for inflation for future years. This means that an individual can leave up to $13.61 million to heirs and beneficiaries without owing any federal estate tax. For married couples, this exemption effectively doubles, allowing them to shield up to $27.22 million from estate taxes. It is important to note that the federal exemption amount is set to automatically reduce to around $7 million per person starting January 1, 2026, unless Congress enacts further legislation.  North Carolina and South Carolina do not impose any state level estate taxes.

Because the estate tax is currently so high, most people will not be subject to the estate tax. However, because we are not sure if the estate tax exemption amount may be dramatically reduced in future years, individuals and married couples who have a high net-worth, or are expected to grow their assets to have a high net-worth, should analyze planning techniques to ensure that their assets pass to their heirs in the most tax-efficient way possible.

Utilizing Both Spouses’ Estate Tax Exemption Amounts

Implementing A Credit Shelter Trust

Effective estate planning strategies can help minimize or eliminate exposure to estate taxes and preserve more of your assets for your heirs. For married couples, utilizing spousal exemption and credit shelter trusts can optimize the use of both spouses’ estate tax exemptions. A credit shelter trust, also known as a bypass trust or a family trust, is a valuable estate planning tool that can ensure the predeceasing spouse’s estate tax exemption is used and not wasted. When one spouse passes away, instead of leaving assets directly to the surviving spouse, the assets are transferred into the credit shelter trust up to the available estate tax exemption amount. By doing so, these assets are not considered part of the surviving spouse’s taxable estate upon their subsequent death. This strategy effectively allows each spouse to fully utilize their individual estate tax exemption, potentially doubling the amount that can be passed on to children and other beneficiaries free of estate taxes.

Credit shelter trusts can also provide additional benefits such as creditor protection, protection from outside influences and duress during older years of the surviving spouse, and protection from issues associated with the remarriage of the surviving spouse. Properly structuring and funding a credit shelter trust requires careful planning and coordination with legal and financial advisors to ensure compliance with estate tax laws and to achieve specific estate planning goals.

Electing for Portability

Another common technique utilized by estate planning attorneys to maximize estate tax exemptions is electing for portability. Portability allows a surviving spouse to receive any unused portion of the deceased spouse’s estate tax exemption, known as the Deceased Spousal Unused Exclusion (“DSUE”) amount. This means that if one spouse passes away and does not utilize their entire estate tax exemption, the unused portion can be transferred to the surviving spouse through portability. The surviving spouse can then combine this unused exemption amount with their own estate tax exemption, effectively increasing the total exemption available to the surviving spouse for estate tax purposes. Portability simplifies estate planning by allowing married couples to make better use of their combined estate tax exemptions without the need for the predeceasing spouse to leave assets to the surviving spouse by way of a credit shelter trust. However, it’s important to note that portability must be elected on the deceased spouse’s estate tax return (Form 706) within a certain timeframe after their death. Proper coordination and timely filing are crucial to ensure that the surviving spouse can fully benefit from the portability provision and minimize potential estate tax liabilities.

Lifetime Gifting

Many individuals and married couples can also use gifting techniques during their lifetime to transfer assets to loved ones while whittling down the value of their gross taxable estate. One common gifting strategy is to make use of the annual gift tax exclusion, which allows the donor to gift a certain amount (currently $18,000 per person per year) to individuals without using their lifetime estate and gift tax exemption. Married couples can combine their exclusions, allowing them to jointly gift up to $36,000 to each recipient without incurring gift tax liabilities. By leveraging this exclusion, individuals and married couples can gradually transfer assets out of their taxable estate over time, reducing its overall value.

More Advanced Strategies

Many high net-worth individuals will need to explore other, more advanced strategies to reduce or eliminate their exposure to estate taxes.  Some of these strategies include using advanced trust arrangements, seeking valuation discounts of assets being transferred, and charitable planning, to name a few.

Conclusion

Incorporating tax-efficient strategies into estate plans requires careful consideration of individual circumstances and goals. An experienced estate planning lawyer can play a crucial role in assessing a client’s needs and designing a customized plan to minimize tax liabilities while maximizing wealth preservation. If you and your family are interested in speaking with an attorney about estate tax planning strategies, call Rivers Law to schedule an appointment today.

Written By Laura C. Rivers, J.D., LL.M.