Estate taxes can be imposed at both the state and federal levels, but neither Virginia nor North Carolina currently impose an estate tax. The federal estate tax applies to estates that are valued above an exemption amount which is adjusted annually for inflation.
For people whose estates may be subject to federal estate tax, some things can be done to maximize your estate tax exemption and reduce the size of your estate for tax purposes. Our Fairfax estate planning lawyer has put together the following strategies to help minimize estate taxes.
When does estate tax apply in Virginia?
The only estate tax that currently applies in Virginia is the federal estate tax. The estate tax exemption for 2023 is $12,920,000. No estate tax is due if the value of a taxable estate is less than the exemption amount.
For persons with estates valued above the federal exemption amount, some estate-planning techniques and tools can be used in conjunction with overall asset transfer and distribution goals to reduce or eliminate estate taxes.
Four ways to minimize estate taxes
Estate planning is about being prepared for when life happens. It’s also about making sure more of your assets go where you want them to go. Estate planning helps families preserve their wealth and provide for future generations. Here are three common strategies used to reduce federal estate taxes.
Postpone tax collection
Married couples can avoid paying estate tax upon the death of the first spouse if everything is given to the surviving spouse. Before 2013, an outright transfer to a surviving spouse would have wasted the decedent spouse’s estate tax exemption leaving only one exemption amount to offset the value of the estate when the second spouse passed.
Under current law, a decedent spouse’s estate tax exemption is ‘portable’ – meaning any unused portion may be transferred to and used by the surviving spouse. However, this does not happen automatically, and an estate tax return must be filed to elect the portability option.
Make lifetime gifts
Transferring property during life can be a taxable event, just as it can be after death. However there is an annual gift tax exemption, and unlimited gifts are allowed to certain beneficiaries. Making lifetime gifts is a way to reduce the value of an estate, and benefit others, and can be done without incurring any tax liability.
The annual gift tax exemption is $17,000 per gift for 2023 and is periodically adjusted upward. Married couples can double the exemption amount and maximize the gift to any one recipient. In addition, the following contributions are generally not considered taxable gifts:
- Paying someone’s tuition
- Paying someone’s medical expenses
- Gifts to a political organization
Create trusts
Trusts only exist on paper, but they can legally own property and in most cases, must pay taxes. Trusts can be used to remove legal ownership of property from an estate. To remove legal ownership, a trust must be irrevocable – but that doesn’t mean all beneficial use of the trust property must be forfeited. Different types of estate planning trusts can be used to reduce estate taxes and provide benefits during life while maximizing the remainder benefits for heirs.
Make charitable contributions
Charitable giving during a person’s life removes property from an estate and may result in an income tax deduction. Charitable giving using a trust as part of an estate plan can produce income tax deductions and lifetime income as well as an estate tax deduction when the trust property passes to the charity.
Don’t pay more than you have to in estate taxes
Nobody wants to pay more in taxes than is necessary. People who have worked hard and saved well want to pass that good fortune on to their families, not hand it over to the IRS.
At Select Law Partners PLLC, we use a combination of estate planning strategies to help clients reduce estate taxes and control more of the wealth they have achieved. Call (855) 541-4867 to schedule a consultation and discuss your options with a Fairfax estate planning attorney.
