How to Minimize Estate Taxes
While the owners of some estates don’t need to worry about their inheritors paying any federal taxes due to the size of the estate, most likely, they will need to be concerned about the payment of state estate taxes. Each of these taxes can eat up quite a bit of the proceeds from an inheritance.
In fact, a number of states assess an estate tax on nonresidents who own property within their state. These states also assess an estate tax on the residents who inherit any estate assets, real estate or otherwise. These states include Vermont, Washington, Oregon, Tennessee, Rhode Island, Oklahoma, Kansas, Illinois, Ohio, North Carolina, New York, Massachusetts, New Jersey, Minnesota, Maryland, Maine, Delaware, and Connecticut.
Pennsylvania, Maryland, New Jersey, Indiana, Nebraska, Iowa, and Kentucky impose an inheritance tax on anyone who inherits assets from an estate located in their geographical location. These taxes are charged upon the totality of the estate.
You Can’t Take It With You, So Spend It
Perhaps the easiest strategy for avoiding excessive estate taxes is to spend the money before you go. Although this is a quick method for reducing the size of an estate, it does pose the potential problem of running out of money prior to your death.
The Gift of Giving Now
For some people, the strategy of gifting or giving away assets while still living offers the added pleasure of seeing the look on the recipients faces when they receive their gifts. One problem does exist with this strategy and that is the simple fact that you might run out of money before you die. Therefore, caution should be exercised when considering this type of strategy. Don’t assume that the recipient of one of your gifts will decide to give it back to you if you decide that you need it. After all, they might have sold the asset, spent the asset, or have a spouse who is opposed to returning the gift even if you do need it.
Move to a Different State of Residence
While this might appear to be a plan of desperation, some people have moved for less serious reasons. However, if you opt for this strategy in reducing your estate taxes, you should consider this decision carefully in every aspect. After all, everyone you know probably lives near your current home. Nonetheless, moving to one of the states that does not impose an inheritance or estate tax of its own could save your inheritors quite a sum of money.
Create an Irrevocable Life Insurance Trust
The creation of an Irrevocable Life Insurance Trust or ILIT as it is also known can significantly reduce or minimize estate taxes. This type of trust is available for both married couples and single individuals. A twofold benefit exists with an ILIT. The first one removes the life insurance proceeds from the estate’s taxable assets. Secondly, the proceeds from the insurance will be accessible immediately, so the money can be used to pay for any expenses that arise including taxes, funeral expenses, and existing debts.
Implementing Advanced Estate Plans
Implementing advanced estate plans into the picture offers several different strategies that can be used to effectively minimize estate taxes. This type of plan is designed to reduce estate and gift taxes while providing for the needs of the grantor or individual who owns the assets. Among the options that you have are: a Qualified Personal Residence Trust, a Charitable Remainder Trust, and a Family Limited Liability Company. Each of these options vary in its terms.