Trusts and Estates

Mininize Taxes by Planning Your Estate Early

Estate tax laws change often, so creating an estate plan with the intent of minimizing or avoiding taxes can be a challenge. However, only individuals with valuable assets have to pay any estate taxes at all. At the federal level, and in those states that impose an estate tax, these taxes apply only when an estate is worth more than a fairly significant amount that is exempted and can be passed along tax-free.

Leave Everything to Your Spouse

The exemption amount excludes assets you leave to your spouse. Federal law allows you to leave your entire estate to your spouse tax-free. On the downside, the exemption amount will apply when that spouse dies (unless the spouse remarries and leaves his or her property to a new spouse). This tactic delays taxes more than it minimizes them.

Irrevocable Trusts Can Avoid Taxation

Your estate will still owe taxes on assets moved into a revocable trust, over the exemption amount. A revocable trust is an extension of you. You still have control of the assets you place into it. Irrevocable trusts are different because you give up control of your assets. After you place them in the trust, you can’t change your mind and take your assets back. The trust owns your assets and can pass them to your beneficiaries tax-free, even if they're worth more than the exemption amount.

Other Trust Options

Credit shelter trusts can hold up to the exempted value of your assets. If you state in your will that you want your assets to move into such a trust when you die, your spouse can enjoy any income they produce, just as if you had bequeathed them directly. However, your spouse's estate would not have to pay estate taxes on their value. This can be important if the inherited assets, added to existing other assets, would put your spouse's estate over the exemption amount.

Choose the Right Beneficiaries

Because estate taxes depend on the value of your assets, retirement accounts and insurance death benefits can incur estate taxes if they bump the value of your estate over the exemption amount. You can avoid this by designating beneficiaries other than your estate for these assets. Some IRS rules apply but, if these assets go directly to a beneficiary, your estate generally avoids paying taxes on them.

Minimize the Value of Your Estate

You can also decrease the value of your estate by making bequests during your lifetime. This takes assets out of your estate so it won't top the exemption amount. However, the IRS has rules for this too, putting a limit on how much you can give to each beneficiary each year. If you go over these limits, you or your estate may have to pay a gift tax.

An Estate Lawyer Can Help

The law surrounding estate planning and taxes is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact an estate lawyer.

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