Safeguarding Your Legacy: An Introduction to Estate and Trust Tax Planning

You’ve worked hard and want to ensure your efforts live on after you’re gone. That’s where estate and trust tax planning comes in.

Getting the basics down now will help build generational wealth and preserve your legacy. But there’s a lot that goes into it.

So, this post will help you establish a foundational understanding of these taxes and what you can do to make them work for you.

Let’s go! 

How estate taxes work

When you leave this earthly realm, the IRS still remembers you, especially if your estate is worth more than $13.61 million.

That’s the federal estate tax threshold for 2024. You might not think your estate qualifies, but think again.

That threshold includes cash, securities, real estate, insurance, annuities, business interests, and other assets.

So, don’t dismiss your eligibility out of hand, especially if you own a business.  

Contacting your CPA or attorney to discuss business valuations is the wisest move in this case.

If you are eligible, the IRS uses a table for determining estate tax liability.

All but the first tier include a base tax. All tiers include a tax applied to the amount in excess of the threshold for that year.

Here’s an example of how the estate tax might be applied.

An Estate Tax Scenario

If someone with an estate valued at $15 million passes away in 2024, that estate is potentially subject to estate taxes. In this case, the estate exceeds the 2024 threshold by $1.39 million.

According to Column C of the IRS chart, their estate takes a base rate hit of $345,000 on the overall value of the estate, $15 million.

It then incurs an additional 40% tax on the portion that exceeds the 2024 threshold, $1.39 million. That portion equals $556,000.

The total tax bill on the $15 million estate comes to $901,000. And for some, it’s even more because this is just for federal estate taxes.

As of 2024,  Washington, Oregon, Minnesota, Illinois, Maryland, Vermont, Connecticut, New York, Rhode Island, Massachusetts, Maine, Hawaii, and the District of Columbia all levy additional estate taxes.

No matter what entity is levying the estate tax, the price tag can be hefty, but there are some things you can do to mitigate it.

As always, every situation is different, so consult with your CPA or attorney before doing anything.

But before you go, here are some more common practices to ask about during that initial meeting.

Establishing a Trust

Trusts are legal arrangements where you transfer ownership of assets to a trustee who manages them to benefit designated beneficiaries.

There are several types, each with distinct tax implications.

Your CPA can help you determine whether a trust is right for you and which one to use based on your situation.

Gifting and Giving

In 2024, the IRS allows you to give up to $18,000 to as many people as you like each year. This can reduce your estate value without worrying about gift tax liabilities.

Married couples can give up to $36,000 per person before the gift tax becomes an issue.

You can also use it to fund a 529 plan. These are education savings plans; you can fund one for children, grandchildren, and even family friends.

This option also lets you contribute up to $18,000 annually without triggering the gift tax and may even help reduce your present tax burden.

All told, you may be eligible to give five years’ worth of annual gifts, up to $90,000 per person.  That number is subject to change each year, so keep checking in with your CPA.

The Bottom Line

Estate planning is complicated, and this post is only an overview of a broad field of information.

So, if you even mildly suspect you’ll hit the estate tax threshold, you should speak with your CPA about estate planning.

Doing so will help you avoid unnecessary worry now and headaches for your loved ones after you are gone.