After building and preserving financial security over a lifetime, you want to ensure you’re your wealth will still be there for your loved after you pass. Death taxes often drive people to extremes to keep their legacy secure for future generations.
As New Jersey is one of six states that imposes inheritance taxes on beneficiaries, residents may not only wish to reduce federal estate taxes during probate but may also wish to decrease the 11 to 16% state tax on distributions. Preserving a legacy is essential as we grow older, so it makes sense to discover strategies to distribute wealth that will keep your estate in the hands of your loved ones.
Preserve assets by giving them away
One of the most effective ways of minimizing the tax burden on estate assets is to give some of it away while you are alive. Whether to loved ones or to a worthy cause or charity, gift-giving puts the money where you want it and will effectively reduce the size of the estate assets that will go through probate.
Tax laws currently allow a lifetime exemption of $11.4 million from gift or estate taxes until 2026, with a joint exemption for married couples of $22.8 million.
Some gifting options can include:
- The Uniform Transfer to Minors Act (UTMA), which allows inheritable gifts to minor children with custodial oversight.
- The generation-skipping transfer tax (GSTT) exemption allows transfers to grandchildren.
- Designate a charity in your trust to donate taxable assets, which will reduce the estate’s overall tax burden.
Preserve, distribute and convert
Taking steps now to manage asset and investment sources will minimize your tax burden. Setting up bequests in a will may guarantee estate taxation during probate. However, you may wish to preserve your assets in a living trust instead, which is immediately effective and still allows you to bequeath real estate, cash accounts and other assets to beneficiaries.
The proceeds from life insurance policies are tax-free. Setting up beneficiary designations for loved ones is an easy and safe way to pass on accumulated wealth, whether through term or whole life insurance policies.
Finally, IRAs and other retirement accounts usually have designated minimum-withdrawal amounts that will be subject to taxation. Although converting these accounts to Roth accounts will impose a federal income tax, it will be less than what beneficiaries would pay.
