6 Ways To Keep Your Estate Taxes Low

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Estate planning isn’t the sexiest topic on the planet, but it’s worth thinking about as you’re deciding how to pass on assets onto your beneficiaries. Sure, you want to ensure that your wishes are honored, making plans on keeping your estate taxes as low as possible. 

Fidelity, one of the largest financial institutions in the U.S., suggests that you consider these six factors as you work out how to keep estate taxes low. The first three have to do with how estate taxes could affect your heirs, whereas the others are more directly tied to helping you lower them.

Understand how the Tax Cuts and Jobs Act (TCJA) Can Affect Your Estate

Right now, you might not have much to worry if taxable assets in your estate are under $1.399 million if you’re single, or $27.98 million for married couples. However, the Tax Cuts and Jobs Act (TCJA), enacted in 2017, is set to expire by the end of 2025. Unless changes are made, the exemption for estate taxes will go down to about half the amount, adjusted annually for inflation. 

Even if you believe your estate is much smaller than around $5 to $6 million, you never know if by the time you pass away, you’ll have that amount. Think about it: After adding up other assets like vehicles and balances in various retirement accounts, your estate could easily get close to or above the tax exemption threshold.

Calculate How Much Your State May Make You Pay

Your state may have different laws when it comes to your estate. Some may have lower tax exemption thresholds. For example, Iowa, Pennsylvania, Nebraska, and New Jersey have an inheritance tax on all assets inherited by beneficiaries. The amount of inheritance tax paid will depend on their relationship with you. 

Other states have much lower exemption amounts. Kentucky, for example, is $1,000, whereas Oregon’s is $1 million.

Factor in Rising Property Values

Even if you’re well under the estate tax exemption in your state, it may be higher in the future. Your home value rises over time. If you don’t expect to have your heirs inherit your property for decades, the increase in value could bump it up well past those exemptions. 

It might be a smart idea to take stock of all the assets you plan on giving to your beneficiaries and be aware of how much estate taxes may be taken out. 

Consider Donating Part of Your Estate

Donating part of your estate to a qualifying nonprofit or charitable organization can help to lower your estate’s value, and therefore lowering the amount of estate taxes that may be owed. A common way you can do that now is by opening and contributing to a donor advised fund. The money in the account can be used towards charitable donations.

There may be some exemptions as to how much you can contribute to this type of account, and other taxes you may be on the hook for such as capital gains tax. Consult with an accounting or tax professional to help you.

Open a 529 Account

A 529 account is a type of investment account where you name a beneficiary and funds can go towards their qualifying educational expenses. Money held in this account is generally not considered part of your estate, as long as it’s held there for at least five years. 

Gift Assets to Beneficiaries Now

Giving some of your money now to your children or heirs could lower your estate’s value, and therefore lower the amount of estate taxes that may be owed.

If you go this route, plan out how much you want to give now and how it can affect what you’ll need to live on now and during your retirement years. You’ll also want to understand how much you can gift before the amount is considered taxable. In 2025, the gift tax exclusion is $19,000, or $38,000 for married couples.

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