Throughout our lives, the government incessantly taxes us. From the day you start working to the end of your retirement, taxes are there to stay. You are even taxed when you pass away!
The estate tax is a government contribution collected from all your assets when you depart this life. Furthermore, estate taxes are generally expensive, ranging from 40% of the estate. As of writing, there’s an $11.58 million estate tax exemption threshold. Now, what can you do to minimise your estate tax?
How Can I Minimise Estate Taxes?
The Crucial Measures
Write a Will
If you have assets that are too important to pass to lawyers for decision-making, create a will even if you do not think of minimising estate taxes. Wills generally include taxes from the government. Nevertheless, this will be your starting point to plan how you can reduce your estate taxes.
Don’t Let Your Assets Go to Waste
Gifting your assets away is a surefire way to minimise estate tax. You can give away a portion of your property to trusted family members by distributing them as gifts. Furthermore, there’s no limit to how many people you can give your assets to. However, keep in mind that you can only give out $15,000/year of your assets without reaching the gift tax threshold.
Another way you can quickly reduce your estate tax is by spending your assets. With the freedom of spending, you can have fun with your expenses and live a lavish lifestyle as long as it is within your means. Remember, it’s best to benefit from your property rather than it going to the government.
The Optional Measure: Get Married
Marriage adds up the $11.58 million estate tax threshold to both of the couples. With this, you’ll have $23.16 million worth of assets that’s free from estate taxes. Hence, if you’re planning to get married, do it while it’s not too late.
The Complicated Measures: Trusts
Crummey Trust is the means of circumventing gift and estate taxes from transferring money to a gift recipient while also having the capability of controlling when the recipient will receive access to the funds.
Having a Crummey Trust lets you transfer money to the trust, during which the recipient will have a limited time of access to it. The transferred money is then treated as a gift that contributes to your annual gift limit, therefore bypassing the estate tax. Furthermore, if the recipient doesn’t take the transferred money, you’ll gain access to it again, therefore giving you another chance to dispense it once again.
Since the transferred money is now part of a trust, you can set how much money you’ll give to your heirs as you see fit.
Grantor-retained trusts or GRAT is a fixed gift trust that utilises a grantor to pass a large sum that avoids gift tax by gifting assets for a binding number of years in which the assets will be given out to the recipients remaining in the trust. Albeit effective, this isn’t recommended to be done on your own. It’s advised for you to consult estate planning lawyers to avoid the hassle.
Irrevocable Life Insurance Trust
Getting life insurance is essential to everyone; however, it can be a double-edged sword too. Life insurances can potentially increase your assets by a considerable margin. This is where irrevocable life insurance trust (ILIT) comes in. By utilising ILIT, you can give out the earnings to another party while ignoring the estate tax bill by paying out the insurance outside of the estate. However, it would help if your trustee is someone on which you can count. Additionally, once you choose the trustee, you must surrender any rights to make any alterations to the trust. Luckily, your spouse, children, or a trusted friend or attorney can be your trustee.
The generation-skipping trust is a legal agreement that you are distributing a part, or all, of your assets to someone in your family that is at least 37.5 years younger than you. This trust evades or minimises estate taxes by bypassing the opportunity to receive the assets. However, during writing, the $11.58 million estate tax threshold is still in play here.
The Extreme Measure: Move to Another State
The effectiveness and severity of estate taxes vary by state. States such as New York, Illinois, Iowa, Connecticut, Kentucky, Maine, Minnesota, Nebraska, Oregon, Pennsylvania, Washington, Vermont, Massachusetts, Maryland, and Rhode Island all collect estate taxes. If you have the time and willingness to decrease or eliminate your taxes to go to the government, consider moving to another state.
Minimising your estate taxes can be a daunting task. You’ll require months, or even years, of preparation to devise a successful plan. Your friends, family, and lawyers will play a massive part in creating your strategy to minimise the tax that’ll come up with your demise. Thankfully, there are surefire ways you can try to keep your well-earned money within the family.