Related Articles

author-banner-img
author-banner-img

10 Lesser-Known Tax Benefits in Estate Planning That Could Save Your Heirs Thousands

10 Lesser-Known Tax Benefits in Estate Planning That Could Save Your Heirs Thousands

10 Lesser-Known Tax Benefits in Estate Planning That Could Save Your Heirs Thousands

1. The Unlimited Marital Deduction

The unlimited marital deduction allows you to transfer any amount of assets to your spouse at death without incurring estate taxes. This provision can preserve wealth within the family and delay taxation until the death of the surviving spouse.

While many are aware of its existence, few maximize its potential through strategic estate plans, such as bypass trusts or QTIP trusts, which help control asset distribution while leveraging this deduction. Proper use ensures assets continue growing tax-deferred.

IRS guidelines at irs.gov confirm that this deduction has no dollar limit as long as the surviving spouse is a U.S. citizen, making it a valuable tool for married couples. It’s a fundamental yet often underused benefit.

2. Step-Up in Basis at Death

One of the best-kept secrets in estate planning is the step-up in basis rule. When heirs inherit property, the asset's tax basis is “stepped up” to its fair market value at the date of the decedent’s death.

This can dramatically reduce capital gains taxes if the heir decides to sell the property later. For example, if your asset appreciated substantially over your lifetime, your heirs can sell it almost tax-free on the gains that accrued before inheritance.

The benefit is detailed in IRS Publication 551. This rule incentivizes passing assets at death rather than gifting during life, where gains would be transferred without basis adjustment.

3. Portability of the Estate Tax Exemption

Portability allows a surviving spouse to use any unused portion of the deceased spouse’s estate tax exemption. This can effectively double the tax-free estate transfer amount available to couples.

Before portability’s introduction in 2011, each spouse’s exemption was fixed and separate. Now, survivors must elect portability on their estate tax return to claim the unused exemption, a step sometimes overlooked.

As per the Tax Policy Center, careful filing can preserve hundreds of thousands of dollars in tax-exempt transfers, lessening the estate tax burden on heirs.

4. The Annual Gift Tax Exclusion

Use the annual gift tax exclusion to transfer up to $17,000 per recipient per year (2024 limit) tax-free, reducing your taxable estate over time. This strategy chips away at future estate tax exposure while helping heirs without complicated tax filings.

Gifts within this limit require no gift tax return and remain exempt from lifetime gift tax exemptions. Spreading gifts among multiple family members multiplies the tax-saving potential.

The IRS gift tax details in Publication 559 highlight this straightforward and effective estate planning method that many fail to utilize fully.

5. Special Use Valuation for Family Farms

Special use valuation allows heirs inheriting family farms or closely held businesses to value these assets based on their actual use, not market value. This often reduces the taxable estate significantly.

This valuation must meet specific criteria and requires a timely filing of IRS Form 706. It provides relief for families whose illiquid property might otherwise incur large estate tax bills.

The IRS outlines this in detail, emphasizing benefits for preserving the farm across generations, ensuring heirs avoid forced sales to cover taxes.

6. Charitable Remainder Trusts

A charitable remainder trust (CRT) is an often-overlooked strategy combining philanthropy with tax benefits. You transfer assets to the trust, receive income during your lifetime, then leave the remainder to charity.

This transfer reduces your estate’s taxable value and provides immediate income tax deductions. It also avoids capital gains taxes on appreciated assets when funded correctly.

IRS rules and guidance under publication 526 make CRTs powerful tools to support causes you care about while optimizing tax outcomes for heirs.

7. Generation-Skipping Transfer Tax Exemption

The generation-skipping transfer (GST) tax applies to transfers that skip a generation, such as gifts from grandparents directly to grandchildren. This tax is in addition to estate and gift taxes.

However, each individual has a GST exemption, currently over $12 million, allowing significant assets to pass across generations without this extra tax burden.

Using trusts that leverage the GST exemption can shield substantial wealth from multiple layers of taxation, as detailed by the Tax Foundation.

8. 529 Plan Contributions for Educational Gifts

Contributions to 529 college savings plans qualify for the annual gift tax exclusion but offer broader benefits. You can contribute up to five years’ worth of gifts (about $85,000 per beneficiary) at once without incurring gift taxes through “superfunding.”

This accelerates estate reduction while benefiting younger generations’ education. Earnings grow tax-free, and qualified withdrawals avoid income taxes.

IRS Notice 2001-81 provides rules, making 529 plans a dual-purpose vehicle for gifting and tax-efficient legacy planning.

9. Qualified Personal Residence Trusts (QPRT)

A QPRT lets you transfer your home to heirs at a reduced gift tax value by retaining the right to live there for a term of years. When the term ends, the property passes to beneficiaries, removing future appreciation from your taxable estate.

This technique requires upfront trust creation but can save heirs significantly in estate taxes without losing your right to reside at the property during the trust term.

IRS Publication 1457 discusses the mechanics and benefits, making QPRTs a clever tool for homeowners with significant estate tax exposure.

10. Life Insurance Inside an Irrevocable Life Insurance Trust (ILIT)

Placing life insurance policies inside an ILIT removes the death benefit from your taxable estate, preventing estate tax on proceeds paid to heirs. This ensures the full value of the insurance benefits your beneficiaries.

Additionally, the ILIT can provide liquidity to pay estate taxes on other assets without forcing asset sales. The trust structure controls policy ownership and distribution efficiently.

The American Bar Association highlights ILITs as essential estate tools for maximizing insurance benefits and preserving wealth across generations.

Read More