For years people have looked for creative ways to avoid paying heavy income and estate taxes. The federal tax overhaul law recently signed by President Trump left many people confused about its implications on their assets. Wealthy families actually benefit the most. Overall, the tax overhaul has made it easier to set up trusts and increase the amount of money you can leave your heirs. Read on to learn more about how to use trust and gifting to reduce your income taxes.
Setting up Trusts
People set up trusts so that their family won’t be burdened with an enormous estate tax when they die. Putting some of your money into a trust means those assets are no longer considered part of your estate. When you pass away, that trust is transferred to a beneficiary, usually a surviving spouse or children.
With the new tax overall, a person is allowed to leave up to 11.2 million dollars worth of assets to their heirs in their wills free of federal gift or estate tax. Such an increase would imply that trusts have lost some importance. Still estate lawyers might point out how the dynasty trust benefits from the increase. A couple can combine their assets and leave slightly over 22 million dollars to future generations.
The tax overhaul gave new tax breaks for qualified business income (QBI). Individuals with a total income of $157,500 can avoid income taxes on 20% of their profits from a sole proprietorship, farming or a passthrough. The 20% exclusion also applies to trusts with an income of $157,00 or less.
Wealthy people should review and possibly update their wills and trust as soon as possible to reflect the new federal tax laws. State tax exemption amounts might be lower than the federal amount. Therefore, your heirs could still face an enormous estate tax.
One advantage gifting has over trusts is the individual sees the benefits of their gift in their lifetime. Your gifting can pay for your children’s house or your grandchildren’s college education. The money you gift is no longer considered part of your taxed assets.
Federal law mandates you can gift up to $15,000 to each individual or $30,000 per couple each year. You must pay taxes for any amount over that limit. If you want to gift an individual or couple more than the maximum amount, consider spreading the gifting over a few months or even years. For example, you can gift an individual $10,000 in November and another $10,000 in January of the following year. Therefore, you avoid having to pay any gift taxes.
Your Trusted Estate Attorney
We hope you found our guide on how to use trust and gifting to reduce your income taxes enlightening. Our team at Tanko Law understand how confusing and intimidating estate taxes can be. Check out our website for more information on estate planning and taxes. Our attorneys will gladly answer any questions you have and draw up any paperwork for you. Montana residents can visit our office or call us at (406) 257–3711 to schedule an appointment.