Shrink That Estate

Adam M. Grossman

I OUTLINED 10 REASONS everybody should have an estate plan in a 2018 article—and what was true then remains true today, especially for those whose assets could be subject to estate taxes.

Under today’s rules, the federal estate tax applies to individuals with assets over $12.9 million. That might sound like a high number. But in 2026, the limit is set to be cut in half. In addition, many states impose their own estate tax, which kicks in at much lower levels.

Because the federal estate tax stands at a hefty 40%, there’s plenty of incentive for high-net-worth families to do what they can to lessen its impact. And yet what I’ve found over the years is that, for many people, estate planning falls to the bottom of the to-do list. There’s a number of reasons for this. Chief among them, in my opinion, is the fact that estate planning requires time and mental energy. Because it’s not a routine task, it can seem like a black box, and many people don’t know how to approach it or where to begin.

Fortunately, there are easy ways to get started. Each of the following strategies can be effective in reducing future estate-tax exposure.

Annual gifting. This is the simplest and probably the best-known strategy, but it’s also underestimated. Here’s how it works: In addition to the $12.9 million lifetime exclusion referenced above, tax rules allow additional gifts to be made on an annual basis. This year, the limit for these annual gifts is $17,000. If your assets exceed $13 million, and you’re trying to defray estate taxes, that might not sound like much, but it can be highly effective.

That’s because it’s $17,000 per donor and per recipient. Consider a husband and wife who have three grown children, all married. That’s two donors and six recipients, for a total of 12 potential gifts of $17,000. That adds up to $204,000, and this could be repeated each year. If you’re able to do this for several years, the compounded value of those gifts could be significant.

Paying tuition and medical expenses. The lifetime exclusion has two notable exceptions: Parents or grandparents are permitted to pay any amount of tuition for family members—or anyone else, for that matter—as long as those payments are made directly to the educational institution. This can be an effective way to move six-figure sums out of your estate. A similar exclusion also applies to medical expenses, which also must be paid directly to the medical provider in order to qualify. While you hopefully won’t need to take advantage of the medical expense exclusion, it’s good to keep it in mind.

529 accounts. Many families establish 529 accounts to help fund their children’s education. In many cases, this makes sense. But they may not make sense for the wealthiest families. That’s because, as described above, tuition has its own exclusion, which is unlimited. Consider a set of high-net-worth grandparents with five grandchildren. They could establish 529 accounts, and that would have the benefit of moving assets out of their estate.

The alternative, though, is that they could instead pay all of their grandchildren’s tuition bills directly. If private college costs $80,000 per year, the total tuition bill for the five grandchildren would be $1.6 million ($80,000 x four years x five grandchildren). All of that could be moved out of the grandparents’ estate without any impact on their lifetime or annual exclusions. While 529 accounts do have the benefit of tax-free growth, the resulting estate-tax savings on this $1.6 million could easily outweigh the tax benefit offered by 529s. But like everything in personal finance, the right decision will depend on the particulars of your family and your finances.

Roth conversions. These aren’t normally viewed as an estate tax strategy, but they’re actually one of the easiest and most powerful strategies available. That’s because a Roth conversion triggers an immediate income tax, and that tax will be paid using dollars that otherwise would have been subject to the estate tax at death. Suppose you complete a Roth conversion of $200,000 and pay $50,000 in associated taxes. Assuming a 40% estate tax rate, this move alone would reduce your estate tax burden by $20,000 ($50,000 x 40%).

Changing your residence. Today, some states have their own estate taxes, but most don’t. If your assets top your state’s threshold, you might consider changing your residence to a no-tax state. Note that you can’t simply buy a vacation home and spend 51% of your time there. You need to change your primary residence in a meaningful way.

What else can you do? I contacted an estate-planning expert and asked for his recommendations. Amiel Weinstock is an attorney in Brookline, Massachusetts. He offered a three-part prescription.

First, recognize that estate planning means different things to different people. It isn’t one-size-fits-all, so the most important first step is to assess your own needs. Older folks, especially those with likely estate tax exposure, will want to focus on wealth transfer strategies. That’s where there’s going to be the most leverage. But for families with young children, a basic will and revocable trust may be the most important thing, because these documents will ensure that the right people are in place to care for and manage the assets of any minor children.

Second, Weinstock emphasizes the importance of term-life insurance for those in their working years. “You could have the best estate plan in the world, but you need to be sure your family would have enough to live on.” The two go hand in hand. If you don’t have sufficient insurance, start this process today. Why? “If you get sick, your insurability could change overnight. But you’d still have time to put together an estate plan.”

What if you’re older and facing likely estate tax exposure? Weinstock offers this third recommendation: Don’t view estate planning as an all-or-nothing project. If you haven’t yet taken steps to manage your estate tax exposure, consider implementing just one strategy to start. You could, for example, set up an irrevocable trust and move a handful of assets into it. Then reassess the following year.

This is good advice. In my experience, many wealthy families delay putting strategies in place because the task seems daunting. But it need not be. Bear in mind that asset values tend to rise over time. Result? The best time to get started is, in most cases, today.

Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on Twitter @AdamMGrossman and check out his earlier articles.

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