How to Beat the Estate Tax:
Tips and Tricks
When a loved one passes, the property and money left to beneficiaries is subject to an estate, or inheritance, tax. What makes this tax so tricky is that it can profoundly affect you, even if you’re not aware of it, and thus significantly reduce the amount to which your beneficiaries are entitled. What challenges, if any, does this tax pose to your plans? What can you do about the estate tax, strategically and tactically, to minimize impact?
First, let’s explore some key, basic facts:
Currently, the estate and gift tax exemption is $5.45 million per person, and a spouse is entitled to use a deceased spouse’s unused exemption. A married couple can expect a federal estate and gift tax exemption of $10.9 million. While there is an unlimited marital deduction, what you give away during your life reduces what you can give away at death – dollar for dollar.
All that said, with some planning, you can learn how to beat the estate tax or at least minimize its impact on you and your loved ones. Consider the following methods that can help make the estate tax bill disappear:
Gift Your Assets
If your intended recipients need the money now, and the amount you’re leaving to them is not significant compared to your wealth, gifts are the easiest solution. In addition to the lifetime gift allowance of $5.45 million, each taxpayer is entitled to give any number of individuals $14,000 annually with no gift tax. Use a trust instead of an outright gift to ensure the money will be used the way you want. As long as you directly pay the provider, and the gift doesn’t count against your lifetime gift tax exemption, you can also give unlimited money for private school or college tuition and medical bills. It also better to give away assets that will appreciate, such as life insurance.
Although it might eat $500,000 of your gift/estate credit, that same gift may be worth $5 million at the time you pass. Take advantage of the discount,and give it away today rather than hold onto it until you die.
Creating an Irrevocable Life Insurance Policy
You can create an irrevocable life insurance policy, or trust, in order to control and take ownership of a permanent or term life insurance policy while you are alive. You are also entitled to distribute and manage the proceeds that are paid once you pass. Once established and funded, an irrevocable life insurance policy can serve the following purposes:
● Help you to avoid gift taxes.
● Minimize state and federal estate taxes.
● Protect the benefits of a beneficiary who is receiving government aid.
● Gives you discretionary powers that allow you to specify when and how beneficiaries receive distributions.
● The cash value that accumulates in the policy is free from taxation, as is the death benefit.
There are a number of ways to beat the estate tax, but it’s important to research your options with a professional to ensure you’re choosing the method that’s right for you and your loved ones.