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Ways to Reduce Your Estate Tax

Gene Kirzhner Nov. 19, 2017

When you leave behind your estate to a loved one, you leave them a great gift. However, that gift comes with the burden of estate tax. If you want to lessen the burden on your loved ones, you should carefully plan out your estate wishes. With these techniques, you can reduce your estate tax.

1. Give Annual Gifts to Your Children and Grandchildren

In your will, you can choose to leave annual gifts to people. Although these gifts usually go to the children and grandchildren of the deceased, they can go to anyone. You and your partner can give $12,000 each to every benefactor without them needing to pay a gift tax. There is no limit to the number of individuals who receive the annual gift. However, the amount must not total more than $12,000 per person (or $24,000 if you and your partner choose to leave a gift). After several years, this amount of money adds up. As a result, less of the estate is taxable.

2. Marital Transfers

Bequests at death and lifetime gifts to your spouse do not require estate tax. However, this is only true if your spouse is a citizen of the US. Noncitizens are not exempt from the tax.

Although a marital transfer puts off the estate tax, it is only a delay. When your spouse passes away, the benefactors of his estate will need to pay the estate tax. This tax includes everything that the other spouse transferred to him.

3. Gift to A Minor

If you want to reduce the estate tax, you can choose to transfer your estate to minors. While the individual is a minor, a custodian gets the gift. Then, she transfers it over to the child when he is old enough. It is worth noting that there is an annual exclusion for lifetime gifts.

4. Irrevocable Life Insurance Trusts

An irrevocable life insurance trust can be a great way to limit the size of your taxable estate. For this technique to work, you need to transfer small amounts of your estate to the trust. Those amounts need to be the same as the amount of the premium of the life insurance. With this technique, you get less taxable estate and a large asset. The life insurance proceeds can greatly benefit your family. Usually, there are no taxes on those proceeds.

5. AB Trusts and QTIP Trusts

Although few people understand the terms AB trusts and QTIP trusts, they are relatively simple. And they can reduce your estate taxes by quite a bit. An AB Trust makes the most out of your unified credit. It also allows your spouse to use your assets during the rest of his or her life.

Meanwhile, a QTIP Trust allows you to move assets to a trust while controlling the disposition of assets upon your partner’s death. This type of trust is common when one spouse has a second marriage and wants to save assets for children from a first marriage.

6. Family Limited Partnership

With a family limited partnership, you can help your family gain ownership of your businesses. It is an estate tool that lets you transfer your businesses over to them. Additionally, it protects your assets from creditors. However, there is another benefit. A family limited partnership also allows the taxation of income to occur at lower tax rates. Instead of full estate taxes, your family can pay less.

7. Qualified Family-Owned Business Interest

If you own a family business, you may want to consider this technique. You can deduct a family-owned business interest from your total estate value. However, the IRS is very strict. For it to qualify for an exemption, your business needs to meet certain conditions. Here are some of the requirements:

  • You owned or participated in the business for five out of the past eight years

  • At least 50% of the business is yours or your family’s

  • The business is, at the very least, 50% of your gross estate

  • You are a citizen of the US or a legal resident

  • The business is in the US

8. Private Annuity

If you sell an asset to a younger generation for a promise to pay annual amounts to the seller, then the sale is known as a private annuity. One of the requirements of the annuity is that the sale occurs until the death of the seller.

When you do a private annuity, your asset is no longer part of your estate. However, the annual payments do count in your gross estate value. Still, this technique can save your loved ones a significant amount of money on the estate tax.

9. Charitable Transfer

When you give a lifetime charitable transfer, you can reduce your estate’s size. In doing so, you reduce the estate tax. The same is true of gifts to charities at the time of your death. These gifts also qualify for an income tax deduction.

Limiting Estate Tax

There is no simple way to limit your estate tax. If you want to give your loved ones as much as possible, you should speak to a lawyer. Estate planning with a lawyer can ease the burden of estate tax.