Estate taxes can significantly erode the wealth you intend to pass on to your heirs, posing a substantial challenge for families with significant estates. Without strategic planning, a large portion of your hard-earned assets could be lost to taxes, diminishing the legacy you leave behind. Many families face this issue, struggling to find effective solutions that preserve their wealth for future generations. What if more of your money could go where you want it to go—towards your heirs and cherished charitable causes—rather than being lost to taxes? At Finley Davis Financial, we understand the complexities of estate taxes and the critical need for proactive planning. Our comprehensive approach structures your estate to help minimize tax liabilities, maximizing the wealth transfer to your beneficiaries.
Estate taxes, also known as inheritance taxes or death taxes, are levied on the transfer of assets from deceased individuals to their heirs. These taxes can be substantial, often reaching up to 40% of the estate's value at the federal level, with additional state taxes potentially applying. The high rates can drastically reduce the amount of wealth transferred to your beneficiaries.
A crucial point to consider is the impending sunset of the federal estate tax exemption in 2026. Currently, the exemption is set at $12.92 million per individual, but this is scheduled to revert to approximately $5 million (adjusted for inflation) unless Congress takes action. This change could significantly increase the number of estates subject to federal estate taxes, making proactive planning more important than ever.
In addition to federal taxes, many states impose their own estate or inheritance taxes, which can further reduce the amount of wealth transferred to your heirs. Some of the states with the highest estate taxes include.
New York: With an estate tax rate that can reach 16%, New York also has a “cliff” provision where estates that exceed the exemption threshold by more than 5% lose the exemption entirely.
New Jersey: While the state has eliminated its estate tax, it still imposes an inheritance tax that can be as high as 16%.
Massachusetts: The state has relatively low exemption threshold of $1 million and a top estate tax rate of 16%
Oregon: Oregon also has a low exemption threshold of $1 million and an estate tax that can reach 16%.
Living in these states necessitates careful estate planning to mitigate the impact of state-level taxes on your estate.
Lifetime Gifting:
Transferring wealth during your lifetime can significantly reduce the size of your taxable estate. Utilizing the annual gift tax exclusion, which allows you to give a certain amount to each recipient tax-free, is an effective strategy. Finley Davis Financial helps you develop a gifting strategy that maximizes the use of annual exclusions and lifetime exemptions, ensuring that your gifts are tax-efficient and aligned with your overall estate plan.
Irrevocable Trusts:
Setting up irrevocable trusts can remove assets from your taxable estate, as these assets are no longer considered under your ownership. Trusts such as Grantor Retained Annuity Trusts (GRATs) or Irrevocable Life Insurance Trusts (ILITs) are commonly used. Finley Davis Financial assists in selecting and setting up the appropriate trusts, providing financial projections to demonstrate the long-term benefits and potential tax savings of each trust structure.
Charitable Donations:
Donating to charitable organizations can reduce estate taxes, as charitable contributions are generally tax-deductible. Establishing a charitable trust or foundation can also provide income and estate tax benefits. Finley Davis Financial works with you to incorporate charitable giving into your estate plan, ensuring that your philanthropic goals are met while maximizing tax benefits.
Family Limited Partnerships (FLPs):
FLPs allow you to transfer assets to family members while maintaining control over the investments. They can also provide valuation discounts for gift and estate tax purposes. Finley Davis Financial helps structure and manage FLPs, coordinating with your legal and tax advisors to ensure compliance and optimal tax treatment.
Life Insurance:
Life insurance can provide liquidity to pay estate taxes, preventing the need to sell assets. Additionally, life insurance proceeds can be excluded from your taxable estate if owned by an irrevocable trust. Finley Davis Financial evaluates your insurance needs and incorporates life insurance into your estate plan to ensure it effectively mitigates tax liabilities and provides necessary liquidity.
Navigating the complexities of estate taxes is crucial for maximizing the wealth you transfer to your heirs. With the federal estate tax exemption set to significantly decrease in 2026 and high estate tax rates in several states, proactive planning is more important than ever. At Finley Davis Financial, we offer the knowledge and proactive planning needed to help minimize tax liabilities and preserve your legacy. Our extensive experience in estate planning allows us to develop strategies that make intentional gifting to heirs and charities a central component of your plan, ensuring your philanthropic and familial goals are met while reducing the tax burden.