You’ve probably heard of “estate tax,” but how much do you know about it? What is the estate tax? How can it affect you? In this article, we’ll give you a quick overview of estate tax.
Estate taxes are, broadly speaking, taxes imposed on the transfer of assets from a deceased person to their beneficiaries. This tax is imposed on the fair market value of the estate’s assets, and it can be a significant burden on the beneficiaries of an estate. So why burden your loved ones while they’re grieving? Let’s consider some ways to minimize estate tax liability.
One of the most effective ways to minimize estate tax liability is simply through proper estate planning! This includes using multiple metaphorical “tools in the toolbox” such as gifting, creating trusts, and utilizing tax-efficient investment strategies. A good estate planning attorney has a range of tools available to them in this regard, and which ones are right for you is highly situational. Let’s talk about a few of them:
1) Gifting is a powerful estate planning tool that allows individuals to transfer assets to beneficiaries during their lifetime. The annual gift tax exclusion, which is currently $17,000 per person per year, allows individuals to give a certain amount of money or assets to another person without incurring any gift tax. Gifting can also be used to reduce the value of an estate and lower the amount of estate tax owed.
2) Creating trusts is another effective way to minimize estate tax liability. Trusts can be used to hold assets and manage them for the benefit of the beneficiaries. By placing assets in a trust, the assets are removed from the estate and are not subject to estate tax.
There are also specific types of trusts that are designed to minimize estate tax liability. For example, a bypass trust, also known as a credit shelter trust, allows a married couple to use both of their estate tax exemptions by placing assets in a trust for the surviving spouse. This allows the surviving spouse to use the assets without them being subject to estate tax when the second spouse dies.
3) Utilizing tax-efficient investment strategies can help to minimize estate tax liability. This includes investing in assets that are taxed at a lower rate, such as municipal bonds, and avoiding investments that generate high amounts of capital gains or income.
4) A life insurance policy is another potential tool that can be used to pay estate taxes. The death benefit from a life insurance policy is generally tax-free and the policy can be structured to pay for estate taxes, in a way that allows beneficiaries to receive more of the estate assets.
It’s also worth noting that estate tax laws are subject to change and it is important to review estate plans regularly and consider how changes in the laws may affect the plan.
In summary, minimizing estate tax liability requires proper estate planning, which can include techniques such as gifting, creating trusts, utilizing tax-efficient investment strategies, and the use of life insurance. It is important to work with an attorney or financial advisor who specializes in estate planning. Contact us online or via phone at (512) 258-9455 to discuss your situation.