If you have worked hard throughout your life and built up a sizable estate, you undoubtedly want to make sure that it is distributed how you want when the time comes. Without careful planning, however, a significant percentage of it will go directly to the federal government in the form of an estate tax. Fortunately, there are some things you can do to help reduce your estate taxes.
Make Gifts to Loved Ones
For many people of means, making gifts to loved ones is the most enjoyable way to reduce their estate tax burden. You can make an annual gift of up to $15,000 to an individual without having to pay a gift tax. Setting up an annual gift to your loved ones not only reduces the size of your estate, but you will also be able to enjoy watching them benefit from this ‘early inheritance,’ which many people enjoy.
Buy Time with Marital Transfers
Many methods used to reduce estate taxes need to take place over the course of many years. If you are married and want to ensure there is as much time as possible to complete these estate planning activities, simply you bequest your estate to your spouse. This will make it so your death does not trigger any estate taxes at all. Instead, the estate tax will only come due when your spouse dies. This will allow your spouse more time to engage in estate planning activities to further reduce the tax burden.
Charitable giving is one of the most common and generous ways that you can reduce your overall tax burden. In addition to reducing the size of your estate by giving throughout your life, you can also set up charitable transfers to be triggered upon your death. The money and assets that are given to the charity of your choice will not be a part of your estate when calculating the estate taxes.
Irrevocable Life Insurance Trusts
Life insurance policies can be a great way to provide financial protection to your loved ones. They can also help you to reduce the size of your estate and lower the taxes you have to pay. To do this, simply set up an irrevocable life insurance trust with money set aside specifically to pay the policy premiums. This money will then be out of your estate. Since the life insurance payout is typically not taxable, your loved one will receive the benefits you want them to have in addition to reducing your taxes. You can set up an irrevocable life insurance trust for each loved one you have a policy for.
Another option is a private annuity, which allows you to sell a valuable asset to someone in your family, typically a child or grandchild. The asset is sold for an unsecured promise saying that they will make annual payments for the rest of your life. This will remove the asset from your estate, and you can use the annuity payments as spendable cash for years to come. This can be an especially effective option for those reaching advanced age.
Know All Your Options
The above options are among the most commonly used techniques to help reduce the amount of estate tax that has to be paid. There are, however, dozens of other methods that can be used based on your specific situation. In order to reduce your estate taxes as much as possible, make sure you work with an experienced estate planning attorney. To get started, please contact attorney Kevin Tharpe to schedule a consultation and discuss your options.