The assets that become a person’s estate generally represent a lifetime of hard work and careful financial management. Testators often have clear preferences regarding who inherits specific assets. Frequently, the most important goal for many testators is to ensure that selected beneficiaries receive as much of their estate as possible.
Thorough planning can help optimize what beneficiaries inherit. Testators can protect their resources from creditors and tax authorities if they are cautious about the planning process. Estate taxes can theoretically have a profound negative impact on the total value of an estate, which is one reason why people with valuable property often plan carefully to reduce estate tax obligations after they pass.
Who potentially owes estate taxes?
Any person who dies with millions of dollars in property could theoretically have an obligation to pay estate taxes. For people who die in 2025, the exemption threshold for federal estate taxes is $13.99 million. Lawmakers adjust that amount annually. For those who die in 2026, the exemption increases to $15 million.
The tax rate that applies varies depending on how much the estate exceeds the exemption threshold. Some estates may pay as little as 18% in federal estate taxes, but the maximum tax rate is a shocking 40%.
How do people plan to minimize estate taxes?
There are multiple strategies that can reduce estate tax obligations. Some people make years of structured gifts to their loved ones. However, it is important to recognize that gifts contribute to the value of the estate.
Transferring assets to a trust is another potentially helpful strategy. The trust becomes the legal owner of assets. The resources that belong to a trust do not pass through probate court after an individual dies.
Taking on a co-owner for certain assets can also be part of a broader tax strategy. Deeds and transfer-on-death designations can help prevent assets from passing through probate court and contributing to the taxable value of an estate.
Individuals who have achieved financial success may need to plan carefully to ensure that their chosen beneficiaries, rather than the federal government, benefit from their hard work and financial success. Crafting an estate plan with a focus on tax liability can help successful individuals optimize the positive impact of their legacy.
