Estate taxes are a hot-topic amongst both political parties and often big news when they are brought to the forefront of campaigns. While the parties battle back and forth, there are still some ways you can potentially reduce the impact of taxes on your estate. Using an estate planning checklist is a good place to start, as it helps you map out your estate planning strategy. Rather than take estate planning advice from just anyone, consider what you really want to do with your money and look for estate planning tips that are tailored to the plans, goals, and ideas you have. Here are five potential ways to lower your estate tax bill.- Transfers to Minors
When children or grandchildren are still minors, you can gift part of your estate to them and have it held by a custodian until they reach the age of majority. The annual exclusion that is used for lifetime gifts applies to this transfer, but it can be an excellent way to reduce estate taxes and help provide for the younger people in your family. Talking with your family members about these types of transfers can help to reduce any confusion about why it is being done or how it works. While many people transfer money to their children and grandchildren, doing so when a child is a minor has different rules and regulations that must be adhered to, because the person receiving the gift has not yet reached the age of majority. - Marital Transfers
Lifetime gifts or gifts at death that are between spouses are not subject to estate taxes. However, when the remaining spouse dies his or her estate will be taxable, including the part that was transferred to them by the spouse. With that in mind, a marital transfer basically defers the estate taxes and does not actually eliminate them. Proper estate planning through a trusted advisor can help reduce the risk of paying too much in taxes for either spouse. - Irrevocable Life Insurance Trusts
According to FindLaw,1 an irrevocable life insurance trust allows for transfers equal to a standard life insurance premium amount. These transfers reduce the size of the estate and create a strong asset in the proceeds from the life insurance policy. Generally, those insurance policy proceeds aren't taxable, so there is little risk of the money that was moved there being lost to taxation. - Gifts to Children and Grandchildren
Annual gifts of $14,000 per person can be made to children and grandchildren who are at or past the age of majority.2 By having a husband and wife both give these gifts, up to $28,000 per year can be given away without taxes. If this is done over a period of years, it's possible to give away a substantial amount of money that would have remained in the estate and subjected to taxation otherwise. This is separate from the lifetime gift exemption for each individual. - Charitable Transfers
There is really no limit on how much you can give to charity throughout your lifetime or upon your death. That can reduce the amount of your estate and help reduce estate taxes for those you leave behind. When you give lifetime gifts, you also get an income tax deduction. Not everyone wants to give money to charity, but if it's an option for you there are a number of worthy causes you may want to consider. Now, if you have reached age 70 ½ and do not need the income from your required minimum distributions (RMDs), you can give this money to a registered non-profit further reducing your taxable income.
Reducing estate taxes doesn't have to be complicated. There are a number of good ways to reduce your taxes legally, and help others out in the process. The best option for your needs is personal so it's very important to understand the implications and requirements of any move you make to reduce your estate taxes. Working with a trusted wealth manager, your attorney and tax professionals will give you a strong perspective on where you can align your choices with what is legally allowable. For more information, contact us here or call 1-800-541-7774 to speak with one of our Wealth Managers.
Sources:
1. FindLaw
2. IRS.gov
The information presented by WrapManager, Inc. is general information only and does not represent tax or legal advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance. WrapManager, Inc. does not advise on any income tax requirements or issues.
