There’s no shortage of factors to consider when it comes to estate planning. Family relationships, last wishes, wealth transfer – your clients will have their hands full.
However, in addition to helping them wade through the often complex process of estate planning, they’ll also be looking to you for one more service: reducing costs.
Passing on assets to loved ones can be an expensive ordeal for the estate, and clients will be craving strategies to help them lessen the financial burden. Fortunately, you’re in an ideal position to help them.
Understanding tax burdens
Taxation is always a good place to start when formulating a plan for your clients. Between estate and inheritance taxes, there are plenty of ways for high-net-worth individuals to lose money when transferring assets to others.
The first course of action is determining which taxes your clients may be subject to. Only 14 states plus D.C. feature an estate tax, according to independent tax policy research organization The Tax Foundation. Washington is the state with the highest maximum estate tax rate at 20%. However, clients must also be apprised of their federal estate tax obligations.
Federal taxes apply to estates with combined gross assets and prior taxable gifts exceeding $5,340,000.
Meanwhile, inheritance taxes are a fact of life for residents of seven states, with Nebraska having the highest maximum inheritance tax at 18% for transfers to non-relatives.
Of course, nothing with taxation is simple, so financial professionals have their work cut out for them in finding possible exemptions.
“While estate taxes are charged against the estate regardless of who inherits the assets, inheritance taxes are levied on the transfer of assets to heirs, based on the relationship of the inheritor to the deceased,” The Tax Foundation states.
This means that spouses, children and siblings have different exemptions under inheritance tax law.
It’s vital for financial professionals to stay up to date on changes in tax law in their respective states, as the past few years have seen a number of reforms and repeals related to estate and inheritance taxes. For instance, Tennessee’s estate tax is set to phase out completely in 2016. Meanwhile, both Maryland and New York have agreed to phase in new estate tax exemptions that will match the federal exemption level by 2019.
Cutting down on taxes
There are various strategies your clients can use to reduce their tax burdens.
Married clients can get ahead of the game by leaving everything to their spouses when they pass. If a spouse is a U.S. citizen, he or she can receive an unlimited amount with no estate tax. Of course, this strategy won’t work for everyone, as a number of factors could prevent a client from wanting to leave everything in the hands of their spouse.
Another idea is removing assets from an estate before your client passes. The smaller the estate, the less taxation it will be subject to. Most clients likely already know who they plan to transfer wealth to, and doing so now in the form of gifts can go a long way toward reducing tax obligations. Additionally, clients get the bonus of actually seeing their loved one receive the gift.
If your client has already reached their lifetime gift exemption limit, other strategies exist. Clients that have the funds necessary to loan money to a trust can use private financing. By establishing and making a one-time loan to an Irrevocable Life Insurance Trust, clients can make money available to loved ones without gifting it.
Not only can this be a great strategy for clients who have used up their gift exemptions, but it works for those who want to save their exemptions for other purposes, as well.
Saving money is only one small part of estate planning, but it’s often among the most important to clients. Financial professionals would be wise to explore all their options when it comes time to help clients save.
Latest posts by Highland Capital Brokerage (see all)
- Robert W. Finnegan, J.D., CLU®, AEP®, Published in Trust & Estates - February 1, 2018
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