Avoid Federal Estate Taxes With Trusts

If you want to transfer your wealth to your heirs, you need to know how to avoid federal estate taxes. The current federal estate tax exemption stands at $11.7 million, and thus very few estates are subject to the tax. Even so, there are ways to minimize the burden.

What Are Federal Estate Taxes?

You have worked hard throughout your entire life to build significant wealth. In turn, you want to leave those hard-earned assets to your heirs. However, the federal government will take a piece of your wealth for taxes. These taxes are a final bill for estates that are over a certain size. When an individual passes away, this final payment must be made to the government.

In 2021, estates with a value greater than $11.7 million are subjected to a 40% tax on the amount over that threshold. These federal taxes must be paid promptly after the person’s death, and they thus reduce the size of the estate.

Calculate Your Net Worth

How do you calculate your net worth and thus the size of your estate? The process is straightforward. You can add up the value of your assets that are subjected to any liabilities. Assets can include bank accounts, personal residences, investments, properties, business interests and life insurance policies.

Make sure to talk to an estate planning lawyer to review your options.

Leaving a Legacy

An estate tax can be a barrier to those who have a successful business. When you want to leave a legacy for your family, you don’t want them to be impacted by a hefty federal tax.

There are ways to reduce your federal tax burden. For example, a family business owner or farmer may want to reduce the size of their estates. These federal taxes are based on the person’s net worth, including investable assets. You could move to another country, but who wants to pick up and leave to avoid taxes? By reducing the size of your estate, you can decrease or eliminate that federal estate tax.

Reducing Your Assets

You can reduce your assets in several different ways. Think about giving away assets, buying life insurance, spending some assets or placing assets into a trust. All these actions can lead to reduced estate taxes for your loved ones.

Trusts Can Reduce Taxes

As previously mentioned, a trust is an effective and reliable way to reduce the size of your estate. When a trust is established, its assets are not considered part of your estate. In some cases, it can even eliminate the entire federal tax burden for your family.

Establishing a Trust

A trust is an agreement among three parties. All the assets are held for a specific beneficiary and are managed by a trustee. That trustee must manage the assets and funds in a way that is advantageous for the beneficiary. When you want to reduce your taxes, these trusts take your chosen assets out of your name

When you need to reduce your federal estate tax burden, all assets moved into a trust will not be considered part of your estate. Bear in mind, however, that as a separate entity, the trust itself will be subject to federal income taxes on the earnings that its assets generate.

Think About a Life Insurance Trust

Irrevocable life insurance trusts (ILITs) can be a helpful tool as well. If you have permanent life insurance, you can transfer it to an ILIT and reduce the size of your estate. An ILIT moves your insurance into a trust, making it the beneficiary. When you die, the beneficiaries of the trust will receive death benefit payouts from the trust.

Get Help from an Estate Planning Lawyer

A trust is one way to reduce your federal estate taxes. If you want a detailed plan to protect your wealth, make sure to speak to an experienced estate planning attorney. The Knee Law Firm has the knowledge and experience to help manage end-of-life taxes. Schedule a consultation by calling the Hackensack office at (201) 996-1200 or by filling out our online contact form.