How Do I Reduce My Estate Tax?
An estate tax is a tax applicable to the transfer of property after death. Estates valued at less than $1,000,000 are not taxed in any jurisdiction. The rate of estate tax of an individual can be up to 40%. Some states also assess estate tax. The IRS form 706 has all the information on exactly which assets count in the calculations. But spending this much amount on taxes can burden your pocket. That’s why we have made a list of tips that can help you to reduce your Estate tax.
Fund a Qualified Personal Residence Trust
A better way to reduce the number of assets for decreasing the estate tax is to fund a qualified personal residence trust (QPRT). You can transfer the ownership of your home into a trust with a QPRT. During the trust’s tenure, you can continue living in your house without paying rent. After that term ends, your children or beneficiaries can take over the asset or property.
Lifetime Gifts to Children and Grandchildren
Every resident of the United States can make annual gifts $12,000 to any number of individuals, specifically to grandchildren or children, without a gift tax. If both spouses engage in gifting, they can mutually give away $24,000 annually per recipient without incurring a gift tax. For several years, the amount of money that can be transferred to a couple’s intended beneficiaries is substantial, reducing the size of the taxable estate.
Make Charitable Donations
Another way to avoid the estate tax is to transfer some of your wealth to a charitable trust. There are commonly two types of charitable trusts: (CLTs) and charitable remainder trusts (CRTs). Some of the available assets in your trust are passed on to a tax-exempt charity in CLTs. By donating to charity, you will decrease your estate’s value and end up with an extra tax break. After you die, whatever is left in the trust will be passed on to your beneficiaries.
In CRTs, you can transfer a stock or another asset to an irrevocable trust. You can make money off that asset throughout your life, and when you die, your investment income will be donated to charity. In the process, you can avoid the capital gains tax and lower your estate tax burden.
Establish a Family Limited Partnership
If there are any family-owned assets or businesses that you want your children to own after you are gone, you can set up a family limited partnership. This involves establishing a general partnership and making heirs, and family members limited partners. You will be able to call the shots as a general partner. But your partners, whether they are your children or another relative, will have a stake in your company.
Set Up an Irrevocable Life Insurance Trust
Life insurance proceeds generally are not taxable. If you don’t want to leave your family in a difficult financial situation after you die, it’s probably a thoughtful idea to buy life insurance. But after you pass away, they could be subjected to taxation if they are included in your estate.
You can make an irrevocable life insurance trust to avoid tax on your life insurance. You need to set up a trust and transfer the ownership of it to another person in your family. The trust is irrevocable because in the future, you would not be able to make adjustments to it without the trust’s beneficiary consent.
