When it comes to estate planning, there’s one topic that always looms large. Yes, we’re talking estate taxes. Clients often turn to professionals because they want to reduce the amount of tax their beneficiaries will have to pay on receiving their inheritance. So, are there any estate tax planning strategies that can help?
In this guide, we’ll explore tax and estate planning and map out the most effective solutions for reducing your client’s estate taxes.
Estate tax is the tax due on the net value of an individual’s estate after their death. Unlike inheritance tax, which is paid by the beneficiaries, estate tax is paid by the deceased’s estate. In the United States this is calculated and paid at federal level, and some states also apply estate taxes at state level.
It’s a little different in Canada. There’s no estate tax; instead, Canadians are subject to deemed disposition tax rules. When an individual dies, they’re deemed to have disposed of their assets at a fair market value. The estate may have to pay capital gains tax as a result.
Tax planning and estate planning go hand in hand. That’s because estate taxes can significantly affect the overall value of your client’s estate. Their assets can’t be distributed to beneficiaries until all the estate’s taxes have been paid—and the higher the tax bill, the lower their eventual inheritance.
One of the simplest estate planning strategies to reduce estate taxes is to make sure you take full advantage of estate tax exemptions.
In the United States, the federal estate tax exemption amount in 2024 is $13.61 million. So, if the estate is worth less than $13.61 million in total, then it won’t be liable for federal estate tax. This figure is adjusted every year, taking inflation into account. One important development to note is that in 2026 the federal estate tax exemption is due to go back to approximately $7 million, adjusted for inflation.
While Canada doesn’t have the same estate tax as the US, there are a couple of exemptions that can help reduce the estate’s capital gains tax. First, there’s an exemption for capital gains on the deceased’s principal residence. Second, the estate can also take advantage of the deceased’s lifetime capital gains exemption. You do, however, have to bear in mind that the total exemption might be reduced if the individual used it during their lifetime.
Gifting plays a large role in estate planning and taxation strategy. That’s because giving large gifts over a lifetime will help to reduce the overall value of an individual’s estate—and therefore any taxes owed—after their death.
While this is one of the most popular and widely-used estate planning strategies to reduce estate taxes, there are a couple of watch-outs. In the US, there’s a limit to how much you can give an individual per year before owing tax. In 2024, this is $18,000 per person. Canada doesn’t have a gift tax but gifts of capital property like real estate may be subject to capital gains tax.
One of the advanced estate planning strategies that professionals use is setting up a trust. However, their effectiveness depends on the type of trust. In the United States, for example, a revocable living trust (a trust that remains within the individual’s control during their lifetime) will help the estate avoid probate costs but won’t help when it comes to reducing estate taxes. An irrevocable trust, on the other hand, will remove assets from the estate to bring down its overall taxable value.
If you’re looking at how to reduce estate taxes then gifts can be a great solution, provided they’re within the annual limit per recipient. In the US, there’s also the lifetime gift tax exemption limit to consider. In 2024, this limit is $13.61 million. If an individual gives away more than this over their lifetime, anything over the limit will be subject to federal gift tax.
Charitable contributions allow your clients to reduce the value of their estate by contributing to the causes they care about. These donations don’t have to be in cash: they can also give assets such as stocks and shares to charity. In Canada, charitable contributions also bring an additional benefit, as your client can claim tax credits during their lifetime.
Family Limited Partnerships (FLPs) can be a useful tool when you’re considering estate tax planning strategies. These are limited partnerships where all the partners are members of the same family. An effective way to safeguard assets from creditors, FLPs are popular with families looking to ensure a smooth transfer of wealth to the next generation.
FLPs work to reduce estate taxes in two ways. First, transferring assets from individual ownership into a partnership removes them from the estate, reducing its overall value. And because the recipients are limited partners, they have no control of the management of the partnership. This means that their assets are illiquid, giving them a discounted valuation.
Life insurance is an important component of estate tax planning. Beneficiaries receive the benefit directly without it having to go through probate. This then gives them a tax-free lump sum that they can use to pay off any estate taxes. What’s more, your client can move any surplus cash into their life insurance policy to maximize the benefit.
Portability allows married couples to put their estate and gift tax exemptions together. So when one partner dies, the surviving spouse can pick up any unused estate tax exemptions and add them to their own. It’s important to remember that portability doesn’t happen automatically. The deceased spouse’s estate has to file a federal tax return in order to elect portability.
It’s a common misconception that estate planning is just for older people. The earlier your clients start thinking about reducing their estate taxes the better. For example, why wait to start giving away assets when you could be reducing the overall value of your estate by making annual gifts over your lifetime?
From FLPs to different types of trusts, there are a number of tools to help individuals transfer their wealth while reducing the tax liabilities of their estate. However, not everything will be appropriate for every client. When it comes to portability, for example, it’s important to balance the potential benefit of combining tax exemptions with the cost of filing the tax return.
One of the most common tax planning mistakes that individuals make is not consulting a professional. When you go it alone, it’s easy to miss out on advanced tax planning strategies that could benefit your heirs. A trust and estates professional can help clients navigate the different vehicles for reducing their estate taxes and ensure these are properly administered. For example, it’s essential to keep meticulous records of any gifts made over your lifetime, even if they fall within the annual limits, in order to avoid complications further down the line.
Minimizing estate taxes is one of the primary goals of any estate plan, and with the help of strategies such as trusts, life insurance and portability, you can help your clients reduce the tax liabilities of their estate.
All of these estate tax planning strategies, however, must be expertly managed—which is where software solutions such as Estateably come in. Estateably is an administration platform specifically for trust and estate professionals. With document automation, comprehensive reporting and task management all at the click of a button, Estateably takes care of the manual, repetitive tasks associated with estate administration, so you can devote your valuable time to finding the right tax strategies for your clients.
Book a free demo today to see our platform in action.
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