Estate and Tax Planning: Minimizing Your Tax Burden Legally

Estate Taxes

While Michigan is a little less tax-heavy overall than some states, you will still need to plan for any taxes that you may (or your beneficiaries may) incur. There is not a specific Michigan estate tax, but your estate may be subject to federal estate taxes if your assets meet the threshold.

An estate tax applies to the total value of your property and money, which is paid out before your heirs receive their assets as you have stipulated.

Some people don’t know that there are legal strategies you can employ to minimize the tax burdens that occur, leaving more value for your loved ones that you intend to inherit or benefit from your legacy.

What is a Charitable Trust?

One of the vehicles that are used to minimize tax burdens is a charitable trust. A charitable trust allows the creator to pass assets to a charitable organization after they pass away or during their lifetime, depending on how the trust was set up.

Charitable trusts are an excellent way to benefit from tax advantages and establish a legacy of giving to charity for future generations in your family. Maybe a church, school, or other charitable organization is near and dear to your heart. By setting up a charitable trust to benefit that cause, you can assist in future community endeavors while taking advantage of tax benefits, reducing income, and retaining more control regarding how your assets are used now and in the future.

Irrevocable Life Insurance Trust

Another excellent option is an Irrevocable Life Insurance Trust (ILIT). This type of trust allows you to avoid including the life insurance payout in your estate. These trusts are irrevocable, meaning they don’t let you access the funds or assets once they are in the trust and are nearly impossible to modify.

Though that inflexibility is unappealing to some, the benefits of directing the funds to a beneficiary without being included in your estate are valuable. Additionally, if you risk any creditors pursuing your life insurance cash value, creating an ILIT adds a layer of protection that creditors can’t access.

Gifts to Grandchildren or Children

Another way to help minimize your tax burden is to use the tax-free gifts option to give your children or grandchildren money or assets while you are alive.

Each party can gift up to a certain amount each year, currently around $17,000, without them having to pay a gift tax on the amount. Married couples can gift up to $34,000 a year before the tax threshold. This amount could lead to substantial tax benefits each year while also directing the funds to future generations and allowing you to see your legacy put to use.

Grantor Retained Annuity Trusts

Another option to consider is a Grantro Retaid Annuity Trust or a GRAT. These types of trusts have been around for decades and have grown in popularity. Utilizing a GRAT can appeal to most of us, not just those who may have significant wealth.

Setting up a GRAT typically involves creating an irrevocable trust for a specified time, funding the trust with your assets, and then paying an annuity to the grantor or creator each year from the trust.

Once the GRAT has reached the allotted timeline you set up in advance and the final annuity payment has been made, the beneficiary receives the assets with little or no gift taxes.

It’s important to note that should the creator of the GRAAT pass away before the specified timeline of the GRAT, the asset within the trust will be included in their taxable estate, and the beneficiary may end up with nothing. Another aspect to consider is if the value of the assets used to fund the trust depreciates significantly, this can lead to issues with the intended advantages of a GRAT.

Marital Transfers or Deductions

If assets are transferred to a surviving spouse, they are typically not subject to taxes. Transfers in this category, commonly called the marital transfer or deduction, can normally occur while the other spouse is still living or upon one spouse’s death if explained in their will.

Marital deductions are an appealing option that allows applications for both estate and gift tax avoidance. One marriage partner can transfer nearly unlimited assets to their spouse without tax implications.

Experience You Can Rely On

When navigating an effective estate plan, it can be challenging to know where to start. The truth is that many of us don’t understand the vast tools and resources available to help us avoid unnecessary taxes.

Some of us may understand the tools but feel they are too complex or time-consuming, so we avoid putting them in place. For decades, we have helped our clients understand their options and how they align with their specific needs and put an effective strategy into place.

This estate plan gives them peace of mind and far more “bang for their buck” on their life’s work and time. Nothing is worse than working all your life and building your nest egg, only to have it taken away due to taxes or other implications you could have avoided by planning.

Call our office today at (248) 997-4394 to set up your case evaluation with one of our team members. We treat our clients like we treat our loved ones, and we understand the urgency of finding a solution that works, ensuring a custom solution for every client and their family that walks through our doors.

We look forward to serving you and your loved ones.