Many people think of estate planning as merely a set of documents that lays out their instructions after they die. However, estate planning also involves strategic preparation during your lifetime.
Everyone has different goals with their estate planning including protecting their vulnerable beneficiaries, leaving instructions for end of life care, providing for children and grandchildren, or even maximizing gifts to charities. But there is one goal that everyone can typically agree on: Minimizing taxes. Here are some steps to take before the end of the calendar year to reduce your tax bill.
If some of your investments have done really well this year, and you have significant gains, you might want to offset some of those with tax losses. While you might not think of investment losses as a good thing, they could really help reduce your tax bill. In order to “harvest” your losses, you’ll need to actually sell the investment for a loss. While this is not something that always has to be done at the end of the year, now is a good time to look at what kind of gains you’ve already had for the year, to determine whether taking a loss before year end is a good idea.
Gifting to Children & Charities
While gifting is not always a good strategy, depending on your circumstances, giving away assets to children, grandchildren, or even charities might provide helpful tax benefits. Generally, gifting to other individuals is not a good long-term strategy, and you should consult with your attorney to discuss the consequences of doing so, especially for Medicaid planning purposes. However, high-net-worth individuals should take advantage of the gifting rules.
Each year, individuals can gift up to $17,000 per person, per year (as of tax year 2023); and you can double that to $34,000 for a married couple! This is a huge benefit for individuals who need to reduce their estate during their lifetime, to avoid estate taxes at death. Right now, this strategy is especially important for the ultra-rich, but estate tax rules are scheduled to change in 2025, which will make this strategy more important for more people. This gifting can be done each year, and if you miss one year, you cannot make up for it later!
Gifts to charities also create a tax deduction. Simply choose a charity, and make a cash donation. Or, if you are donating something other than cash, such as property or a vehicle, make sure you do this sooner rather than later, to ensure the gift is completed by December 31st. If you cannot choose a charity, you can instead donate to a Donor Advised Fund (“DAF”) which counts as a completed gift for tax purposes, but doesn’t actually distribute to a charity until later.
Make sure you are contributing as much as you can to your retirement accounts. There are limits on how much you can contribute each year, so be sure to check with your financial advisor to make sure you’re doing all that you can.
Also, if you have to take required minimum distributions (RMDs) make sure you are taking them on time to avoid penalties. This could apply to your own retirement account, if you are old enough, or could apply to you if you’ve inherited an IRA. There have been many changes recently with the passing of the SECURE Act, so again, be sure to check with a financial advisor to ensure you are withdrawing a suitable amount.
So while you are planning for the upcoming holidays, make sure your finances are in order as well. Schedule time with your estate planning attorney, your financial advisor, your accountant, and any other relevant professionals to make sure you can meet your financial and estate planning goals!