Taxes and Estate Planning: Protecting Your Legacy

When most people think of estate planning, wills and trusts come to mind. But taxes are just as critical—because without the right planning, taxes can erode the wealth you’ve worked hard to build. Estate planning is about more than dividing assets; it’s about ensuring that your family and beneficiaries receive the maximum benefit from your legacy.

At Winthrop Partners, we help clients align their financial plans with smart tax and estate strategies. Let’s explore how taxes intersect with estate planning—and what you can do to keep more of your legacy intact.

Why Taxes Matter in Estate Planning
The federal government and, in some cases, state governments impose taxes on wealth transfers. Without planning, these taxes can dramatically reduce what your heirs actually receive. The main ones include:

• Estate Taxes: The federal estate tax applies to estates above a certain exemption amount. For 2024, the exemption is $13.61 million per individual. Anything above that can be taxed up to 40%.

• Gift Taxes: Large gifts made during your lifetime may also be taxable, though there are annual exclusions ($18,000 per recipient in 2024).

• Income Taxes on Inherited Assets: While many inherited assets receive a “step-up in basis,” retirement accounts like IRAs are taxed when beneficiaries withdraw funds.

The takeaway? Good planning can help minimize or even avoid these taxes.

Tools for Reducing Estate Taxes

1. Trusts

Trusts can be powerful vehicles for minimizing taxes and protecting assets. Options include:

• Revocable Living Trusts (flexibility, but no tax savings).

• Irrevocable Trusts (remove assets from your estate, reducing taxable size).

• Charitable Trusts (support causes you care about while reducing estate value).

For more details, see the American Bar Association’s estate planning guide.

2. Gifting Strategies

Making gifts during your lifetime can reduce the taxable value of your estate. With annual exclusions, you can transfer significant amounts tax-free over time. For example, a couple could gift $36,000 per year to each child without triggering taxes.

3. Family Limited Partnerships (FLPs)

An FLP allows you to transfer ownership of family businesses or real estate gradually, often at a discounted valuation for tax purposes.

State Estate Taxes: Don’t Forget the Local Rules

While many states have eliminated estate taxes, some—including Pennsylvania—still impose inheritance taxes. Rates depend on the heir’s relationship to the deceased. For example, children pay 4.5%, siblings pay 12%, and other heirs pay 15%. More details are available from the PA Department of Revenue.

Retirement Accounts and Estate Planning

If you hold assets in 401(k)s or IRAs, estate planning gets more complex. Thanks to the SECURE Act, most non-spouse beneficiaries must empty inherited retirement accounts within 10 years. This means a potentially larger tax bill for heirs unless strategies are in place.

Options include:

• Roth Conversions: Pay taxes now at potentially lower rates, so beneficiaries inherit tax-free assets.

• Charitable Beneficiaries: Direct retirement accounts to charities, which don’t pay taxes.

Estate Planning and Business Owners

For business owners, estate planning is even more critical. Without a succession plan, heirs may face liquidity problems (estate taxes due in cash), which can force a premature sale. Strategies include buy-sell agreements, life insurance policies, and trusts designed for business assets.

Common Estate Planning Mistakes

1. Waiting too long to create a plan.

2. Not updating documents after major life events.

3. Ignoring digital assets like cryptocurrency or online accounts.

4. Relying solely on DIY tools that don’t address state-specific tax rules.

Next Steps: Protecting Your Legacy

Estate planning isn’t just for the wealthy—it’s for anyone who wants to protect loved ones, minimize taxes, and ensure their wishes are honored.

At Winthrop Partners, we guide clients through:

• Crafting customized estate plans that align with financial goals.

• Partnering with attorneys and tax professionals for comprehensive strategies.

• Updating plans regularly as tax laws and family situations evolve.

📌 Start today: Schedule a consultation with our team to see how an integrated financial and estate plan can protect your wealth and your legacy.