How To Improve The Tax-Efficiency of Your Estate Plan


When was the last time you thought about your estate plan? If you can’t remember, it’s likely been too long. 

At Blue Rock, we talk all the time about how taxes permeate every aspect of your financial life—your estate plan included. 

Here are ways to bring more tax efficiency into your estate plan, and why it’s important.

Brief Estate Planning Check-up

Before you can make your estate tax-efficient, you must have all the necessary paperwork, beneficiary designations, and titles in order.

What about a will?

While a will is an important part of your estate plan, it’s far from the only item to check off your list. Several elements should take precedence.

  • Update beneficiaries 
    • Beneficiary designations are often the first step because these take priority over the instructions in your will. Let’s say you leave everything to your spouse in your will but the official beneficiary on your old IRA is still in your ex-spouse’s name. In this case, the official designation a.k.a the IRA would take precedence over the will.
  • Account titling
    • Properly titling your assets can bring efficiency and care to your estate plan. Consider transfer on death and payable on death accounts as appropriate for your situation.
  • Establish a trust
    • Creating the right trust for your needs—charitable remainder, living, revocable, special needs, etc.—should often come before creating your will. Trusts are an excellent vehicle for passing wealth to beneficiaries of your choice and specifically specifying rules for distribution of the assets in the trust as opposed to an outright transfer. 

Your estate planning tune-up should be less about begrudging over the language in your will and more about ensuring that your assets are moving to the right people in a streamlined and efficient manner after you pass. Your account designations set the tone for the rest of your estate plan. 

Your will is more of a catch-all. It acts as a supporting document to make sure your personal property outside of investments, insurance, real estate, and more passes to whom you want them to.

Will Estate and Inheritance Taxes Impact You?

The Tax Cuts and Jobs Act of 2017 significantly increased the estate tax exemption—$11.7 million. However, you still can’t ignore the tax consequences of leaving an estate even if the total value will be significantly below that. Here’s why.

First, the TCJA has a sunset provision and the exemption amount is set to revert back to $5 million in 2026—half of what it is now.

Second, even if that means taxation still isn’t an issue for you at the estate level, your beneficiaries will still have to address taxes at the individual level. Properly managing your estate can mean they pay less. That’s particularly true given the SECURE Act killed the stretch IRA except for in a few limited cases. What’s the stretch provision?

The stretch provision allowed beneficiaries of inherited IRAs to stretch the account distributions throughout their life, providing more control over cash flow, account balance, and the tax implications of the inheritance. The SECURE Act altered the language, meaning that most non-spouse beneficiaries need to withdraw the entire account balance within 10 years. If beneficiaries are in peak earning years, this could result in an unexpected tax windfall. 

A valuable tax planning tool you have, while it lasts, is the ability to step up the basis of appreciated inherited assets. This can help reduce the future capital gains your beneficiaries realize.

If you do have an estate that will be subject to taxation at the federal level, you can reduce that by utilizing an irrevocable trust. However, understand this will present a trade-off between tax savings and the ability to access your money. The choice will come down to your preference or need for flexibility. It’s important to note. there are provisions such as a five-by-five power or HEMS (health, education, maintenance, and support) to provide some access to liquidity, although the level of access is minimal.

Make The Most of Gift Tax Exemption

If you are concerned about surpassing the federal estate exemption limit, consider making annual gifts in the coming years to take advantage of exemptions and reduce your estate.

You can exclude up to $15,000 in gifts per year without incurring a tax liability. The exclusion is per recipient, meaning you can give $15,000 to each of them. Married couples can maximize this by each giving $15,000 to a certain person, resulting in $30,000 in tax-free gifts per year. 

There are also favorable ways to help someone pay for education or medical expenses. You could potentially exclude up to $75,000 given to a 529, or tuition payments and medical bills on someone’s behalf if paid directly to their school or hospital.  

If you already make regular yearly charitable contributions, you may want to consider lumping multiple years together in a single gift. This is beneficial if you otherwise wouldn’t itemize deductions, but the larger gift pushes your total deductions above the standard deduction. The organization will still get the value of your gift, and you’ll get to deduct more on your tax return.

Tax-Efficient Ways To Pass Down Wealth

A trust is a legal agreement that stipulates how you, the grantor, want the trustee to distribute assets to the trust’s beneficiaries. There are many different types of trusts and the particular kind you need depends on how you want your assets to be managed. Using a trust will provide you with immense flexibility while maintaining control of your assets. 

A common example of how a trust is utilized is to control the flow of assets. With a trust, you can spread the distributions out over many years, direct that distributions start once the beneficiary reaches a certain age, or when other requirements are met.

One of the biggest benefits is that most trusts will keep your estate from going through probate when you pass. Probate is costly, public, and time-consuming which can all cause unnecessary stress for your already grieving family.

Options for Those Charitably Inclined

There are a few other ways you can increase the tax efficiency of your estate through giving. 

Charitable trusts allow you to deduct assets placed in the trust, but as is the nature of trusts, you retain control of when the assets are actually distributed. The trust can be set up so that the charity gets regular distributions (charitable lead trusts) or the remainder of the trust after a period of time (charitable remainder trusts), and the payments can either be fixed (annuity trust) or varied based on a formula (unitrusts).

With a Donor Advised Fund, you can take a charitable deduction as though you were giving to charity when you contribute to the fund, but the money doesn’t actually leave the fund and go to a charity until you direct the funds to make the distribution.

You can also make qualified charitable distributions (QCD) from your retirement accounts and avoid paying taxes on the distribution. If you have a retirement account that is subject to RMDs, the qualified charitable distribution can satisfy those up to $100,000 per year. 

Increase Your Estate’s Tax-Efficiency With Help from Blue Rock

There are many estate planning strategies you can benefit from even if you don’t exceed the exemption limit. 

Estate planning is complex and it can sometimes be hard to even know where to start. We will gladly help organize and walk you through it and help you get an understanding of how to best increase the tax efficiency of your estate. 

Call us today to get started.