Estate taxes are a form of death tax where the authorities can take a sizable portion of a decedent’s assets before they can be passed on to their heirs. The federal estate tax rate is up to 40%. There is an exemption limit which was recently revised to $11.18 million. This means that if you leave assets worth $12 million for your heirs, the federal government can seize up to $4.8 million.
What’s more, most states also have their own estate taxes where the limit is much lower. For example the estate tax exemption limit in New Jersey is $675,000. If you started saving money in your early twenties or thirties and own a property with mortgage paid off you would probably have more than that saved up and end up paying a large portion of your wealth in taxes.
Estate planning helps you and your heirs manage how taxes are levied on the inherited assets and income for your loved ones. An accountant and estate attorney can best advise you on how to sort through the complex tax process. We will cover four strategies you can use to make the process easier for your descendants.
Write Up a Will
Most of us don’t like to think about death. Writing up a will reminds us of our own inevitable demise hence many people put off the writing of a will. A survey found that more than 60% of US adults do not have a will while 17 percent said that they don’t think they needed one.
Without a will, your leftover estate will be divided through a probate court according to intestacy law. What this means is that the state will make up a will for you. This will leave your heirs with a much bigger bill. If your estate is not properly assigned the only people that benefit are the estate and the attorney at the expense of your family.
Set Up a Trust
If you have a large estate that falls above the tax exemption limit or worried that your heirs won’t use your money wisely, you can set up a trust and appoint a trustee to manage your wealth.
Trust can be permanent, irrevocable or last for a specific period of time. They are the best option in terms of tax benefits. You can put money into a trust without paying any taxes. However, once the money has been placed into a trust, the money no longer belongs to you. As a result it cannot be subject to estate taxes once you pass away.
Although the trustee controls the money, you can put stipulations on how it is used. Money can be dispensed from the trust to make regular payments to your heirs. You can do this even while you are alive. A trust can work like a company and carry out business activities but it will need to pay taxes on any income generated as a result of its activities.
You don’t have to leave all your assets for distribution through your will. You can also set up retirement funds and life insurance policies and name beneficiaries for these assets. In case of your death, these policies and accounts will be directly transferred to the beneficiary without forming a part of your estate which will keep them out of the estate tax.
Gift Your Money While Alive
The IRS allows individuals to give up to $15,000 per person in gifts each year. Distributing your wealth in gifts would help bring down your total assets below tax limit. The gifts are also tax free for recipients.
You can also donate to charities to reduce your estate value. Individuals can set up a special donor fund that regularly gives to charities that you designate or it finds worth giving to. By depositing money into a charity fund you can instantly remove a substantial amount from your estate value, thus lowering your taxes.