4 Methods of Cutting Your Estate Tax

One of the main functions of an estate planning lawyer is to help minimize your tax obligations in the event that you pass away. If your estate is bigger than the federal exemption, you may be obligated to pay an estate tax to the federal government, and that tax can reach 40%. Here are four estate planning steps you can take to lower your potential taxes.

Use the Gift Tax Exclusion

You are allowed to give each person up to $15,000 annually without having to pay a tax to the federal government. You can begin to distribute money while you are still alive. If you are married, both you and your spouse can each gift a recipient with this money, doubling the amount that you can give without tax liability. When you give to children and grandchildren, you can gift a large amount of money each year in total, cutting your possible estate tax bill and also giving people money when they need it.

Life Insurance Trust

While the proceeds from a life insurance policy itself are not subject to federal income tax, they can be taxed as part of an estate. In other words, the life insurance proceeds count toward the estate tax threshold so long as you own the policy.

One way to no longer own the policy while you are still alive is to place the policy in a life insurance trust. This is a trust that is established solely for the purpose of holding the policy and reducing estate tax obligations.

You can also use a life insurance trust to set up conditions, terms, and limitations on how the beneficiaries receive or spend the policy proceeds. When you set up the life insurance trust, bear in mind that it is generally irrevocable and beneficiaries cannot be changed. You can establish a revocable life insurance trust, but it will not receive the same favorable tax treatment as an irrevocable trust.

Donate to Charity

When you leave an asset in your estate to charity, it does not count against the amount of the estate tax exclusion. You can create a charitable remainder trust and place the asset into it, which has the effect of reducing the size of your estate.

Then, you can purchase life insurance that can effectively replace the asset and put the insurance into a trust. So long as you are not the owner of the life insurance policy, you have the means to add back to what your beneficiaries will eventually inherit without adding to the estate for purposes of the tax.

This approach gives you the added benefit of supporting a cause that is near and dear to your heart while possibly saving your family from a tax burden. Like any other trust, this needs to be irrevocable in order to receive the tax benefits, so placing this asset in the trust cannot be undone once it occurs.

Family Limited Partnership

Estate taxes can burden those who need to transfer business interests to their children. When there is a closely held family business, there is a potentially large tax bill for the children if they inherit the company.

The effect of this tax can be lessened with a family limited partnership. An estate planning lawyer can help you establish this instrument. This will essentially be composed of pooled family financial resources. This option is revocable, and there may be additional tax benefits when it comes to income from the business.

The advantage of this instrument is that it allows the parents to maintain control over the company while giving a gift of their interest to the children. Parents can transfer assets into the partnership up to the gift tax exclusion each year. This is not limited to just interests in a company; it can also include stocks, bonds, and real estate.

Call the Knee Law Firm in Hackensack, NJ, at (202) 996-1200 today to find out how an estate planning lawyer can help you.