Proper Estate Planning to Pass Assets Tax Free

While taxes may be the last thing on your mind when planning your estate, the reality is the repercussions of certain bequests can have significant tax-related repercussions down the road. One of the best ways to avoid a surprise come tax time is to speak with Alan G. Orlowsky, an experienced Chicago estate planning lawyer who can explain the implications of making certain gifts.

Giving Gifts

One way to avoid spending a significant amount on estate taxes is to give gifts to your loved ones during your lifetime. This is because, under federal law, testators can give away up to $15,000 in gifts every year without reducing their estate tax exemption. However, gifts that are given in excess of this amount will require the person giving the gift to file a gift tax return.

It’s important to note the annual exclusion is calculated according to the recipient and isn’t the sum of all the gifts given. This means a person can give $15,000 to a cousin, another $15,000 to a friend, and another $15,000 to a neighbor without having to pay taxes on those amounts. Gifts between spouses are generally unlimited and will never trigger a gift tax.

Converting Traditional Retirement Accounts 

When a person inherits an IRA or 401(k) account, he/she will be required to make regular income tax payments on any distributions obtained from these accounts, until they are liquidated.  When an account balance is particularly large, a beneficiary could receive especially valuable distributions, which would need to be taxed at a higher rate. However, it is possible to avoid leaving beneficiaries with income tax liability by converting traditional retirement accounts into Roth accounts, which allow for tax-free distributions.

Creating a Charitable Remainder Trust

Charitable remainder trusts allow testators to convert highly appreciated assets, like investments, into a lifetime income without having to pay capital gains taxes when the asset is eventually sold. This is achieved through the creation of an irrevocable trust, which essentially removes the asset from a person’s estate, while also giving the gift-giver an immediate charitable income tax deduction.

In these cases, the trust will pay the creator an income until his/her death, at which point the remainder will go to the chosen charity. Ultimately, creating this type of trust reduces income and estate taxes, while also giving individuals a way to benefit a charity that is special to them.

Alternatively, a person could create a Charitable Lead Trust, in which they transfer an asset to the trust, reducing the size of the estate, and saving on taxes. However, instead of paying the trustor, the trust pays an amount to a charity for a specific number of years or until the trustor’s death. Once the trust is terminated, the assets will be transferred to the trustor’s beneficiaries.

Call Today for Help Planning Your Estate 

If you have questions about the best strategies for passing on your estate tax-free, please call Orlowsky & Wilson, Ltd. Attorneys at Law, where our lawyers are well-versed in estate planning in the Chicagoland area. We can be reached at 847-325-5559 or via online message.



Updated as of July 2019
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