How to avoid estate tax
Estate taxes are taxes imposed on estates that have their market value above the exclusion limit as stated by law. Properties with a market value below the set exclusion limit are free from paying estate taxes; however, properties above the exclusion limit will be required to pay an estate tax on the amount that exceeds the exclusion limit.
The properties will be assessed to gauge their eligibility to pay the prescribed estate taxes based on their current market value, and not based on the market value when it was purchased or constructed.
What is the prescribed exclusion limit?
In 2019, the exclusion limit set by the Internal Revenue Service was $11.4million but was increased to $11.58million in 2020. This, therefore, shows that after the death of the property owner, the estate of that individual will be valued. Any amount realized above the $11.58 million exclusion limit will be taxed as the estate tax. However, if the individual has given out taxable gifts during his/her lifetime and has had deductions from the exclusion limit available, the deduction of prices will reflect by reducing from the exclusion limit to be used.
Many taxpayers do not like the idea of losing some of their assets to the government in form of estate taxes, especially since estate taxes are known to be quite expensive ( sometimes up to 45%-55%).
The majority of individuals desire to pass on their wealth to their heirs intact without engaging in a battle with government officials to settle estate taxes and a lot are afraid the estate tax can cost them many of their treasured assets. This is because when the heir cannot afford to pay the tax, the IRS can decide to liquidate some assets to settle the tax. Due to these reasons, a lot of individuals usually look for ways through which their heirs can avoid paying estate taxes after their death
Avoiding estate tax
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Married couples can jointly use estate tax exemptions.
Every individual has an exclusion limit of $11.58 million. For married couples also, each spouse has an exclusion limit of $11.58 million each making a total of $23.16 million. Using this exclusion jointly greatly increases the limit by which the market value will be accessed. Also, it should be noted that couples can gift each other an unlimited amount of gifts without filing a gift tax. Therefore, an individual can decide to gift his spouse all his estate or large sums of money to reduce his estate value at death.
Another consideration for married individuals is that after the death of one spouse, the living spouse can claim their exclusion limit and add to his/her own.
For example, If Mr. Rain dies using $1million from his gift tax and has an exclusion limit of ( $11.58 million – $1million =) $10.58million. Mrs. Rain can add his remaining exclusion to her Unused exclusion of $11.58 million, giving her a total of $22.16million.
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Reduce assets from estate
One of the major ways individuals tend to avoid estate tax is by reducing the amount of their taxable liabilities and estates before the time of death.
These individuals believe in using their estate in the way they desire rather than having the government determine it for them after death. This strategy takes advantage of the annual gift-tax exemption limit given by the government stating that individuals can give out up to $15,000 to another entity without having to file a gift tax return or have a reduction from their lifetime gift tax exemption limit.
Therefore, while alive, the individual can start gifting out gifts worth $15,000 or below each year to loved ones to reduce the worth of their estate after death. It can be satisfying to see your inheritance and estates being shared, used, and distributed according to your desire while still alive.
For example, gifting out $15,000 to your 3 children and 7 grandchildren within 7 years will reduce a grandfather’s estate by $150,000. If his spouse also decided to gift out assets, using the same strategy, they would be able to reduce up to $300,000 of their assets within the 7-year period.
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Set up a Trust
An individual can secure some assets in a trust like an Irrevocable life insurance trust which is not taxable. A qualified personal residence trust can also be set up.
This trust helps to transfer your home into a trust even while you are still living there, however, there is always a limit of time attached. When the time limit set for the trust runs out, the individual listed as the beneficiary of the trust will be the new owner of the home and properties. Some individuals even remove income-generating assets from their estate by setting up a GRAT/GRUT (Guarantor retained (Annuity/Unitrust). Through this, the exempted assests are no longer part of your estate, and when the deadline for the trust elapses, the assets go on to the beneficiary.
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Giving to charity
Giving away assets to IRS approved and recognized charity organizations is a great way to reduce the size of your estate. Gifts to these charity organizations attract a no gift tax exemption and are usually put towards a good and moral cause. Most individuals prefer to give away a lot of their assets to charity organizations to support their cause, rather than to end up paying it to the government as tax.
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Buy Life insurance
Buying life insurance is always a smart strategy to prevent your family from losing any asset in estate taxes. The proceeds from life insurance can help the Family and heirs in the long run and furthermore. Tax will not be demanded from the proceeds of life insurance if the life insurance is created as an irrevocable life insurance trust.
The majority of tax payers do not even worry about estate taxes because they do not have properties that exceed the prescribed exclusion limit. However, individuals that have worked to accumulate wealth and have millions of dollars in assets will certainly be worried and consider legal ways to avoid estate taxes. The worst scenario comes when some assets have to be sold to offset the required estate tax liability.
As much as estate tax is legal, there also exist ways to avoid paying them on your estate after death. Speak with a qualified tax professional today to know your options.
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