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Charitable Giving helps your Estate Tax Burden

Charitable Giving: 3 Of The Best Ways To Reduce Your Estate Taxes

We recently posted an article about Estate Taxes and how the value of your company affects how much your heirs may have to pay. We pointed out the benefit of having your business properly valued so your heirs know exactly what to expect regarding the value of your estate. We also briefly touched on the idea of transferring portions of your company ownership during your lifetime in order to lessen future tax burdens.

In this post, we’d like to help you discover a few more things you can do now to lessen this future tax burden. And while it can often be uncomfortable to plan ahead for what happens after you’re gone, leaving your loved ones with a secure future and well-defined peace of mind is still one of the best gifts you can give.

  1. Use All of Your Exemptions

    As of 2020, if you are married, you and your spouse (if they are a U.S. citizen) can both claim up to $11.58 million to be exempt from Federal Estate Taxes. That means over $23 million could be shielded! (Consult current tax laws or your tax professional for the most up-to-date advice.)

    When one spouse passes, the surviving spouse does not have to pay any taxes on inherited assets. However, when that spouse eventually passes away, remaining heirs will be responsible for paying applicable estate taxes.

    In order to avoid this, each spouse could split their estate and put up to $11.58 million into separate living trusts. When Spouse 1 dies, their trust uses their $11 million exemption, and Spouse 2’s trust is unaffected. The second trust comes into play only when Spouse 2 dies. Meanwhile, Spouse 2 still has access to all of the assets in the first trust.

  2. Reduce The Size of Your Estate

    Smaller estate = smaller tax bill. It sounds obvious, but if someone eventually has to pay taxes, it’s better for them if you reduce your estate now. In addition to what we covered in the last article, here are a few more ways to do just that:

    (Note: Southard Financial is a valuation firm. We are not financial planners, accountants, or tax lawyers. Consult yours for the best advice. However, these are things we have seen many of our clients benefit from, and we just thought we’d share them with you.)

    1. Spend some and enjoy it! You’ve worked hard, and you have every right to enjoy what you’ve earned. Buy things. See the world. Be sure to set plenty aside for the necessities of life, though. As long as you aren’t being irresponsible, this is a great way to reduce future taxes.

    2. Give tax-free gifts. Currently, you can give an individual up to $15,000 ($30,000 if married) per year without any tax implications. So you and your spouse could give your three children and seven grandchildren $30,000 each and shrink your estate by $300,000 this year. This is a great way to be able to watch someone enjoy part of their inheritance while you’re still around to enjoy it with them!

    3. Give to charities. Donations to charities can provide significant tax deductions on income while allowing you to give away significant assets that can later be used by the charitable organization…making this an ideal way to reduce the overall value of your estate while doing some good in the world. There are several ways of doing this:

      • Cash. The gift that is always the right size. And anyone can do it.

      • Company shares. Business owners have the added advantage of being able to donate shares of their companies. If you do, however, you will need a dependable valuation company to help determine a proper value. We do this all the time.

        The IRS can always challenge a valuation, though. While your goal is to donate as much as possible to maximize your deduction, the IRS wants your valuation to be low in order to minimize your deduction . That’s why it is important that the valuation firm you partner with is familiar with the methods used by the IRS. It can get complicated quickly, which is why Southard Financial is committed to staying on top of things for our clients.

      • Charitable Remainder Trust (CRT).  This lets you convert a valuable asset into lifetime income for yourself, reduces your tax exposure, and helps a charity that is important to you. Here’s how it works: You transfer the asset to an irrevocable trust, which takes it out of your estate and gives you a charitable deduction for that year’s taxes. The trust then sells the asset and reinvests the proceeds in income producing assets. The trust pays you an income, and after you pass, it gives the assets to your chosen charity.

      • Charitable Lead Trust (CLT). In this option, you move an asset into an irrevocable trust, reducing your estate and saving on taxes. The income produced from the asset, however, goes to the charity. When you pass, the trust dissolves and the assets then go to your spouse or heirs. 

These are just a few ways that you can plan ahead and lessen the impact of estate taxes on your family. Talk to your financial advisor to learn more about these and other ways to make the most of your money. And when you need a trusted and experienced valuation firm to give you accurate numbers, give us a call at Southard Financial. We’ve been a part of helping clients just like you give generously to future generations and to charitable organizations for nearly 35 years. Let’s talk and see what we can do for you!

Set up an appointment by phone at 901-761-7500 or contact us online.

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