How to Take Care of Your Estate Taxes
Unlike income taxes and probate costs, which can vary and are, relatively, not that high, estate taxes are almost always a high percentage of the entire estate that is being taxed. While these taxes are collected within nine months of the death of the owner of the estate, the amount varies – and what determines this variance can be pre identified by the savvy estate planner. While they can be minimized, or outright eliminated, this process takes careful thought and planning, and is often best done with professional assistance from those who specialize in the field.
The tax rate, exemptions, and laws regarding estate taxes are not set in stone and have evolved overtime and will likely continue to evolve as time goes on. However, there are certain aspects that do not change. The larger the number of heirs will always result in less taxes being collected, as they are applied to the inheritors and not the estate as a whole. Where one person would incur the standard estate tax rate upon receiving an unprotected estate, the exemption would essentially double if there are two inheritors, and so on and so forth. That is not the best way to minimize estate taxes, as it can become convoluted fairly quickly. Rather, a living trust can outright eliminate an estate tax if it is set up in the proper manner.
In the simplest of terms, there are four easy to apply tactics to reduce, or even eliminate, the burden of an estate tax. The first is applicable if you are married, and in that case, it is strongly suggested that you and your spouse apply both estate tax exemptions. If your spouse is a US citizen, then there is no limit to what you can leave them, the issue comes when your spouse dies. By placing the exemption in the trust, it becomes possible to apply it after death as it is no longer in your name. Because the exemptions change over time, it is important to understand the exemption amount as it applies in the year you die and not in the year the trust is written. This aspect of a trust need not be updated regularly, but it should be kept under review. If the exemption is too low when compared to your assets, another option should be looked at to further lessen the tax burden. This does mean that two different types of tax exemptions could be applied, especially if the exemption has changed drastically between the deaths of spouses.
The second manner in which you can reduce, or outright eliminate, estate taxes, is charitable donations. Not only can these be written off on your taxes, thus diminishing your taxes for that year, it also devalues your total estate. This option is best for those items, or funds, that you were not planning on giving to another heir, or that you feel could be helpful in some manner. There are two types of charitable trusts, a charitable lead trust and a charitable remains trust. The former involves placing assets in an irrevocable trust and allowing them to be passed onto tax exempt charities for a certain period of time, after which the remaining assets will pass on to your other beneficiaries. The other involves placing a stock or other appreciable asset into a trust, allowing you to make money off of it throughout your lifetime and passing into a tax-exempt charity upon your death.
The third involves removing your assets from your estate before you die, which can be accomplished by placing them into a living trust that is in the name of the trust and not yours. The other manner in which to reduce your estate is by spending your estate – whether that means utilizing funds in your bank account(s) and by giving gifts that fall beneath a certain level (such as a tax-free gift). You already know who you want to receive certain belongings from your estate, so it is possible to give them now before you die – reducing your estate and the costs associated with it. Much like estate tax exemptions, tax-free gifts are of a variable value per individual, but can be doubled when given jointly with a spouse. These gifts can be given once a year to as many people as you want, which can drastically reduce the size of your estate without negatively impacting it or your heirs. Any number of assets can be removed from your name and transferred into the trust, though some of them come with time restrictions. For example, it is possible to remove your home from your name and place it into your trust, but there is a 10-15-year time period (which is standard) that this lasts before it is passed to your trust beneficiaries. You can live in your home during and beyond this period, though if you are alive after it is over the house is now legally owned by the stated beneficiary. So, it is important to understand the consequences, both positive and negative, when transferring assets into your trust.
The fourth is to buy life insurance in order to replace assets that are given to charity and/or are utilized to pay any remaining estate taxes. It can be an inexpensive solution to replacing any asset(s) that have been removed from your estate prior to your death. It is possible to use an Irrevocable Life Insurance Trust, which removes the death benefits from your policy and places them into a trust if you live three years beyond the purchase of the insurance policy. It is a quick way to protect your estate and your heirs without putting any undue stress on you.
Federal estate taxes are a nuisance to many, but not as many people as are thought. How an estate tax is determined is by taking your assets and subtracting any debts that the holder of the estate has. With the exemption varying from year to year, the number of people it affects varies just as much, so it is important to keep oneself apprised of those exemptions. As of April 2018, that federal exemption per individual is $11.18 million, which means there is no tax on estates that are below that amount. At the same time, for those estates that exceed the current exemption, it is applied per inheritor at the amount they inherit. Theoretically, if there are two heirs to an estate worth an estimated $22.36 million estate, the estate would be exempt from the tax, as their estimated inheritance would be at the exemption. These laws are at the federal level, though, so it is important to be aware of state laws, too, as their estate taxes almost always begin at a much lower level than the federal tax exemption. Just as well, certain states have an inheritance tax in addition to the taxes mentioned above – those are paid for by the inheritor and not by the estate itself. Just as it is important to be informed of the laws, both at state and federal level, when setting up a trust, so, too, is it important to understand the laws applied to the estate itself.
