Avoiding estate taxes
When you pass on your family may have to pay what is called estate taxes in order to inherit or take over your estate. This can be a big financial burden on your family, especially if you have a large estate. However, with some planning on your part, you can avoid estate taxes, and leave your family a little better off. How?
Estate taxes depend on two things:
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- How much the estate is worth, and
- How much planning you have done before-hand
Try the following in order to avoid estate taxes the best that you can:
Keep your estate's value under a million:
While estate tax laws change frequently, currently if the estate value is under a million dollars you are exempt from paying estate taxes. So, if you are going to leave your estate to your family, one way to help them avoid paying estate taxes is to not have a very large estate. Of course, this does not mean you will be unable to avoid them if you have a larger estate.
However, the estate tax on the first dollar over the exemption equivalent is almost 40% so it may be worth keeping it under or finding other ways to keep yourself from owing a lot.
Pass your estate to your spouse:
If you are married, your estate will normally pass to your spouse if you die. Because of a tax law known as the "unlimited marital deduction," there is no estate tax when property passes to your spouse. Of course that only helps you avoid paying estate taxes for a short while, as when your spouse dies, your children or whomever the estate is left to will have to pay the taxes on it.
Give it away in pieces before you die:
One way to avoid estate taxes for your family is to slowly give your estate away before you die. Of course you need to do this the right way, meaning, only gift away up to $11,000 per person per year. Otherwise, you'll be hit with very steep gift taxes on any amounts over that. You may also pay for tuition, or pay for medical bills, without paying gift tax on the amounts.
Trusts, etc.:
You can also use a revocable living trust with an AB provision. This is where a spouse leaves up to the exemption amount of their property in an irrevocable trust for the surviving spouse and children. The surviving spouse has the right to use it when needed. This can make a dramatic difference in the amount of estate tax owed when the second spouse dies, because the exemption amount of both the first and second spouse are used instead of just that of the last spouse to die. This can really help if you have a large estate.
