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6 ways to protect your inheritance from taxes

6 ways to protect your inheritance from taxes

Individuals with a vast number of assets, properties, and estates usually desire to pass on their inheritance to their loved ones and favorite individuals. However, this desire for the transference of wealth can be hindered by the requirements of the law to pay certain taxes on inheritance and estates after the death of the owner, thereby, reducing the wealth to be received as inheritance by the heir by a substantial amount.

After the death of certain individuals, their assets and estates might be subjected to different taxes like the inheritance tax, federal estate tax, lifetime gift tax, etc. All these taxes kicking in can certainly reduce the inheritance of the heir by a sizable amount. However, there are certain things that can be done to prevent taxes chipping away a large amount from your estates after your death. When these are done, you can rest assured that your wealth can be distributed according to your desires and specifications and not just as required by the law.


 How to protect your inheritance from taxes


  1. Gifting assets to your spouse who is also a citizen of the United States

Assets and properties can be gifted to a spouse to any amount without the fear of paying a gift tax or exceeding the annual gift tax exclusion limits. Gifting to a spouse will certainly not reduce your lifetime gift tax exemption limit of $11.58 million. In fact, married couples each have a lifetime gift tax exemption of $11.58 million which amounts to a collective amount of $ 23.16 million worth of estate that can be given off without attracting a gift tax.

When a spouse dies, their lifetime gift tax exemption and federal estate tax exemption are added to that of their spouse, thereby increasing the limit on the amount of inheritance the spouse can gift out to loved ones before their death. Gifting assets and estates to your spouse prevents your heir from paying taxes on your wealth after your death.


  1. Give a sizable but limited amount yearly to loved ones

There is a limit placed on the worth of the cash or assets that you can gift to an individual without being required to file a gift tax return. Giving out assets or cash amounts of this limit over the years can help you give out a large amount of your wealth personally during your lifetime and not have to pay tax for it.

By employing this strategy, you can avoid paying taxes on a large inheritance left after death. The annual gift-tax exclusion amount is $15,000 limit to an individual each year. Therefore, over the years, you can gift out $15,000 annually to loved ones to reduce your assets to a limit that won’t attract certain taxes after death.


  1. Giving to Charity

Money donated to IRS approved charity organizations is non-taxable and will not count against your federal estate tax exemption limit after death. This is an avenue to be generous and help individuals that genuinely need help while at the same time, reducing your assets to avoid tax on your inheritance. Definitely a Win-win avenue.

Individuals with estate or assets above the federal estate tax exemption limit who do not want the excess to be remitted to the IRS can leave a percentage of their estate to charity and the rest to their heir(s), thereby reducing their assets because the percentage given to charity is non-taxable.


  1. Place assets into a trust

Your assets can be placed into trust funds for the future use of your children or grandchildren for specific purposes. Some individuals create trusts for their grandchildren’s college education payment, or for the medical treatment of a particular member of the family. Assets placed into funds are no longer counted as part of your tax liabilities or estate, and it can no longer be included as part of your taxable assets after death. Creating these trusts can reduce the size of your estate upon the event of your death probably below the limit that can warrant an inheritance tax or federal estate tax.


  1. Spend a lot while you’re alive

Most individuals believe in saving and the accumulation of wealth, however, it becomes a headache when they discover the amount that they will have to remit to the government after death.

It is good to save and to retain wealth, however, it is also good to live a good life and enjoy the wealth you have while you’re alive. It makes little sense to accumulate all that wealth while surviving on a meager budget then have a large portion of your assets taken away from your heir(s)as taxes in the event of your death. Spend and live a good life with your wealth. Enjoy your wealth and spend a good amount of it before you die. Take vacations, buy cars, and sip on champagne and caviar on the beach. Spending sufficiently can help you reduce the taxable amount of your estate before death.


  1. Take out life insurance

It is advisable to take out life insurance and ensure the payout of the life insurance goes into a trust to prevent it from being taxable. The Life insurance taken out can pay for the inheritance tax against the property left behind and therefore prevent important properties and assets from being taken over or sold as tax payments. The life insurance will certainly not reduce the amount of tax to be paid on the estate, but it will surely provide a way to pay for these taxes in a way that leaves the inheritance intact for the heir.


Many taxes spring up after the death of a wealthy individual and due to the large tax bill, certain family properties and treasured assets may be lost as a result of inheritance tax, federal estate tax, etc. To prevent the possibility of this occurrence, many taxpayers are eager to understand the different legal ways to protect their inheritance and avoid much of it from going to the government in form of tax payments.

None of the ways provided above are illegal or acts of tax evasion, they are all legitimate ways to ensure your Wealth gets distributed according to your specifications without losing too much of it to taxes.

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Internet subscribers, users, and online readers are advised not to act upon this information without seeking the service of a professional accountant. Any U.S. federal tax advice contained in this website is not intended to be used for the purpose of avoiding penalties, of any kind, under U.S. federal tax laws.