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How Estate Planning can Reduce Your Tax Burden

Tax preparation is an essential consideration when creating an estate plan. When creating an estate plan, there are multiple taxes that California residents should seek to avoid, including income taxes, estate taxes, and inheritance taxes. When dealing with a sizable estate, these taxes can potentially reduce the size of your estate by a large percentage. Here are several popular ways to reduce tax liabilities on an estate:



Gifting remains one of the most effective estate planning techniques. By strategically gifting assets through a person or a couple’s lifetime, they are able to remove the assets from their estate before passing away. A smaller estate means a smaller tax burden. For many California residents, the best type of gifts are the ones most likely to appreciate over time. For example, a parent gifts a $500,000 home to his or her child. By the time the parent passes away, a full 40 years later, the house is now valued at $3 million dollars. If the gift were made at a later point in time, the gift would have been taxed more heavily.

Annual Gift Tax Exclusion


As of 2018, a person may gift up to $15,000 to any person without any tax consequences. A married couple can combine their annual limit and gift up to $30,000 in cash or other assets to any single person each year without any tax consequences. Importantly, while there is a limit on the size of the gift, the federal tax code does not limit the number of gifts that can be given by any individual or married couple. Therefore, a married couple could gift each of their four children the maximum amount during the year and reduce the size of their estate (with no tax consequences) by $120,000. If the married couple did this every year for 10 years, they have now reduced the size of their estate by $1.2 million dollars, all tax-free.

Lifetime Gift Tax Exclusion


Even if the gift exceeds the annual limit, a taxpayer will still be able to gift up to $5.5 million during his or her lifetime without any tax consequences. For married couples, the limit is set at $11 million. To see how these two tax provisions can significantly reduce the size of an estate, considering the following scenario. If parent gifted their child a $35,000 vehicle during 2018, then the first $15,000 would be tax-free under the annual gift tax exclusion. The remaining $20,000 would be applied to the $5.5 million lifetime gift exclusion. This means that unless the parent had already gifted $5.5 million then the remaining $20,000 would also remain tax-free.

Family Limited Partnership


A family limited partnership is a type of business entity in California. The business entity is formed when members of a family “pool” their assets into a single family-owned business partnership. Each family member then owns “shares” of the family limited partnership. Because the collective group of assets is technically owned by a business entity and not any single member of the family, the assets in this business entity will not be included in an estate when any member of the family passes away.

Irrevocable Education Trust

 For parents or grandparents who want to ensure their children and grandchildren have the opportunity to attend a college or university, an irrevocable education trust can serve a dual purpose of providing a college education while also minimizing the tax burden of their estate. While contributions to an education trust severely limit the flexibility of assets poured into the trust, these contributions to the trust fund will not count against the lifetime gift tax exclusion.

If you are ready to take control of your estate planning and develop a plan to transfer assets in the best available method, an estate planning attorney can help plan and implement an estate plan for you. Because California has so many regulations as well as options to avoid consequences, it is important to obtain legal advice and guidance from an experienced estate planning attorney.

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