UNDER FEDERAL ESTATE TAX LAW, THERE ARE SEVERAL WAYS TO SHRINK THE TAXABLE ESTATE:
Lifetime gifts
Each individual has an annual gift tax exclusion, currently $17,000 per person per year, generally allowing for tax-free gifts to others. (Note, state or local law may differ, and these values apply to 2023 and are subject to adjustment for inflation in future years.) Spouses who are both U.S. citizens can gift any amount to each other, generally with no estate or gift tax consequences. However, the survivor’s now larger estate could face a greater estate tax problem when he or she later dies.
Marital deduction
Charitable giving
Gifts to charities, during life or at death, reduce the estate size.
Bypass trust
Beginning in 2011, a change in federal estate tax law provided that any portion of the applicable exclusion amount that remained unused at the death of a spouse could be held over and made available for use by the surviving spouse in addition to the surviving spouse’s own applicable exclusion amount. This “portability” opened up new planning opportunities that did not exist under prior law. With the applicable exclusion amount currently set at a very high level, plus the introduction in 2011 of the “Deceased Spousal Unused Exclusion” (see below), for federal estate tax purposes at least, the bypass trust is less useful than before. When planning for state death taxes, however, often with much lower taxability thresholds, the bypass trust remains a useful estate planning tool. A type of trust known as a “bypass” trust allows the first-to-die of a married couple to set aside a portion of his or her assets. In years before 2011, such trusts were used in an effort not to “waste” the first-to-die’s applicable exclusion amount.
Deceased spouse unused exclusion (DSUE)
PAYING ESTATE SETTLEMENT COSTS While careful planning can help reduce estate settlement expenses, the planning process also needs to consider how to pay for the costs that do remain. There may be a need for funds to sustain the family until the estate is settled, to pay off debt or otherwise provide for the surviving spouse or children. An estate will often need to sell assets to raise
the needed cash. While some assets are relatively liquid, others may take months or even years to be sold. Working with your investment advisor, you may need to rearrange some of your assets to provide increased liquidity to your estate. If there are currently not enough liquid assets in the estate, consider life insurance to provide the needed funds.
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