One of the goals of estate planning is to reduce tax implications for your beneficiaries after your death. If your assets are over the estate tax exclusion, it is important to be aware of your options and common mistakes that people make when estate planning.
Including charitable giving in your estate plan
If you have substantial assets and your estate is over the threshold for estate tax purposes, it may be beneficial to leave something to charity in your will. By appointing a charity as a beneficiary of your will, you can guarantee that your assets are allocated to causes you were passionate about as well as reduce estate taxes for your other beneficiaries.
Gifting during your lifetime to reduce your assets
You can reduce your assets for estate tax purposes by gifting during your lifetime. As of 2023, you may gift up to $12.9 million in assets during your lifetime to reduce the value of your estate. Keep in mind that you must outlive your gift transfers by at least three years to avoid it being included in the value of your estate for estate tax purposes.
Common mistakes to avoid
Unintended consequences can be avoided by planning for potential issues during the gift-giving process. Proper planning can help ensure that your gifts align with your wishes.
Improper documentation and reporting of gifts
One common mistake is improperly documenting gifts made in an estate plan. It’s essential to keep detailed records of any gifts given, including the recipient’s name and the date and value of the gift. Additionally, in 2023, any gifts in excess of $17,000 require the person gifting to file a gift tax return. Failure to document according to proper guidelines and reporting requirements could lead to unintended consequences, such as disputes between beneficiaries or legal challenges.
Failing to consider the impact on Medicaid eligibility
If you plan to apply for Medicaid at some point, it’s important to be aware of how gifts made in your estate plan could impact your eligibility. The law includes a “look back period,” which is a certain number of months during which the state can examine your financial transactions to determine if you’ve given away assets to qualify for Medicaid. Giving gifts during this period could lead to a penalty period for Medicaid benefits.
Neglecting to update your estate plan
Updating your estate plan as circumstances change is critical. If you have gifted to others during your lifetime, and if you do not want them to inherit any more of your estate after you have passed, you must update your estate plan.
