Common Questions about Estate Planning and Taxes: Part II

In the previous article, we addressed several questions related to estate planning and taxes—Common Questions about Estate Planning and Taxes: Part I. Listed below are additional questions about estate planning and estate taxes.

1. What is the marital deduction?

The marital deduction is an estate planning deduction that allows a marriage partner to transfer an unlimited amount of assets to his spouse without being taxed.[1] The total amount of assets that is transferred to the spouse is subtracted from the decedent’s gross estate; this amount is the marital deduction.[2] Almost all property qualifies for the marital deduction, and there is generally no limit;[3] however, there is a limited annual exclusion for non-U.S.-citizen spouses ($185,000 in 2024). The transfer to the spouse can occur during the couple’s lifetime or after one of the spouse’s deaths (e.g., transfer by a will).[4]

‍

2. How can I minimize my estate taxes?

There are several ways to minimize estate taxes. The first way to minimize estate taxes is by reducing the estate value through gifts. Making gifts annually (up to $18,000 per individual gift recipient in 2024) reduces the decedent’s estate. As discussed below, irrevocable trusts and irrevocable life insurance trusts are also an option to reduce estate taxes.[5] Another way to reduce estate taxes is by leaving funds to charities through proper estate planning.[6]

‍

3. Are life insurance proceeds subject to estate tax?

While the proceeds of life insurance are typically tax-free for the beneficiary, they can still be included in the taxable estate.[7] They will be included in the decedent’s taxable estate if: (1) the proceeds are payable to the decedent’s estate, or (2) the proceeds are payable to named beneficiaries, and the decedent had any incidents of ownership in the policy at the time of his death.[8] To avoid the first problem, make sure that: (1) you designate a primary beneficiary other than the decedent’s estate (e.g., a trust), (2) you utilize contingent beneficiaries, and (3) you regularly review and update the policy beneficiaries. To avoid the second problem, you can transfer the ownership of the policy to another person or entity.[9] One popular option may be to create an irrevocable life insurance trust (“ILIT”).[10]

‍

4. What is the Generation-Skipping Transfer Tax?

The generation-skipping transfer (“GST”) tax is a federal tax on gifts or inheritances that prevents the donor from avoiding estate taxes through gifting money or bequeathing property to his grandchildren, or any individual who is at least 37 and a half years younger than the donor.[11] This tax closed the loophole that wealthy individuals were using to legally gift money and bequeath property to their grandchildren to avoid estate taxes.[12] However, GST is only a concern when the donor exceeds his lifetime exclusion ($13.61 million in 2024).[13]

‍

5. How do trusts affect federal estate taxes?

Different types of trusts may have different federal estate tax consequences. Revocable trusts, for example, are living trusts that are in the control of the grantor. The assets in the trust are excluded from probate; however, they are still included in the grantor’s estate for purposes of the federal estate tax. Irrevocable trusts are different because the assets are removed from the grantor’s estate and are typically not subject to estate taxes. For more information on different types of trusts, please see Types of Trusts: Which One Is Right For You?

‍

Conclusion

Knowing your federal tax obligations is essential when addressing your estate planning. Taking the appropriate steps and filing any necessary forms with the IRS during life and after death will save both time and money. If you would like more information on your tax obligations, or if you have more questions about estate planning, contact Montgomery Legal today. Schedule a Consultation or call (214) 432-6100.

‍

‍

[1] Ashley Kilroy, How Does an Estate Tax Marital Deduction Work?, SmartAsset, available at https://smartasset.com/estate-planning/estate-tax-marital-deduction.

[2] Id.

[3] Marital Deduction, Legal Information Institute, available at https://www.law.cornell.edu/wex/marital_deduction.

[4] See Kilroy, supra note 1.

[5] Estate Taxes: Who Pays, How Much, and When, U.S. Bank, available at https://www.usbank.com/wealth-management/financial-perspectives/trust-and-estate-planning/estate-taxes.html.

[6] Id.

[7] Brian Beers, How to Avoid Taxation on Life Insurance Proceeds, Investopedia, available at https://www.investopedia.com/articles/pf/06/transferlifeinsurance.asp.

[8] Id.

[9] Id.

[10] Id.

[11] Troy Segal, What is the Generation-Skipping Transfer Tax (GSTT) and Who Pays?, Investopedia, available at https://www.investopedia.com/terms/g/generation-skipping-transfer-tax.asp.

[12] Id.

[13] Id.

‍