Estate planning can be an important part of a broader strategy to manage financial legacies and minimizing tax burdens. By utilizing specific estate planning tools, individuals can protect their assets and help better ensure more of their estate passes to their beneficiaries rather than to tax collection agencies. Several estate planning instruments specifically aim to help achieve this goal. Understanding each tool’s function and application can offer significant financial benefits. Some common examples include:
- Trusts: Irrevocable trusts often provide tax advantages by removing the trust’s assets from the taxable estate. Assets within these trusts, therefore, are generally not subject to estate taxes upon the death of the grantor.
- Gifts: Annual gifting reduces an estate’s taxable value. In 2025, the IRS allows individuals to give up to $19,000 per person per year without incurring gift tax. This is referred to as the annual exclusion rate. The rate varies by year.
Strategic use of these tools can help individuals to reduce their taxable estate and their tax obligations.
Practical scenarios illustrating the benefits of estate planning tools
It can help to have examples to better understand the impact of these tools. Take John, for example. John establishes an irrevocable trust and transfers his vacation home into it. If done wisely, the property’s value does not contribute to the estate’s value at John’s death, reducing potential estate taxes. In another example, we have Sarah. Sarah gifts $15,000 annually to each of her three children. Over ten years, she reduces her estate by $450,000, which decreases her future estate tax liability since she stayed below the annual exclusion rate.
Use of the methods outlined above not only help to better ensure that a larger portion of an estate reaches the intended beneficiaries but also helps to secure a family legacy. Individuals are wise to tailor a plan that best suits their financial situation and goals, optimizing the benefits these tools offer.