5 Ways to Reduce Your Estate Tax

Benjamin Franklin once said that only two things in life could be considered certain: death and taxes. It seems that nothing testifies to the truthfulness of this maxim better than the estate tax – after all, it’s a tax paid after a person dies. It is levied on the estate of the deceased person before the distribution of the assets to heirs and beneficiaries. In 2018, the amount of the estate tax remained at 40% while the tax exemption amount rose to $11.2 million. This means that all estates whose net value exceeds $11.2 million will be taxed by the federal government.

If you feel uneasy about the estate tax, you are certainly not alone. After all, the value of your estate represents the money you worked hard to earn and save. Understandably, you would like to make sure that, after your passing, this money will be used for the purposes that are important to you – especially for the financial protection of your loved ones.

The good news is there are a few proven and completely legal ways of protecting your financial legacy and minimizing your estate tax. In this blog, we will analyze 5 of them.

Remember Marital Exclusion

If you have a spouse who is a U.S. citizen, you can arrange to transfer all of your assets to them and benefit from the unlimited marital deduction. This means no tax will be paid on these assets. However, this doesn’t solve the problem of the estate tax completely – rather, it merely defers it until your spouse passes away.

Reduce Your Estate By Spending More Money

The more net value your estate has, the more estate tax is going to be paid after your passing. However, if you manage to reduce the size of your estate now, the federal government will consume less of its worth upon your death. The simplest and the fastest way to reduce the size of an estate is, of course, to start spending more money.

The problem with drastic spending is, however, that no one can accurately predict how long he or she is going to live. Spending too much can get you into financial trouble if you need more money than originally expected in the years to come – for example, due to an unforeseen medical condition or the need for long-term care. However, there are other, more controlled ways, of reducing the size of your estate.

Reducing Your Estate by Giving Tax-Free Gifts

Since you probably know how you would like your wealth to be distributed among your heirs at the time of your death, you may start giving away some of your assets to your children and other beneficiaries already. As of 2018, the federal law allows you to give up to $15,000 to any person without incurring gift tax. If you are married, you can give up to $30,000 to each of your children without having to make any filing. Over a period of a couple of years, this can considerably reduce the amount of the estate.

Set Up an Irrevocable Life Insurance Trust

If you are a legal owner of a large life insurance policy, the death benefits from this policy will be added to the total net value of your estate and subjected to the same estate tax before being transferred to the beneficiary. By setting up an irrevocable life insurance trust (ILIT), you can shield the death benefits from taxation by making the trust both the owner and the beneficiary of the policy.

The caveat is the ILIT requires really good planning. First, an irrevocable trust cannot be changed or amended. Second, in order for your life insurance policy not to be subject to the estate tax, you need to live for at least three years after you set up the ILIT.

Set Up a Family Limited Liability Company

A family limited liability company is another powerful estate planning tool that can considerably reduce the size of your estate and allow you to transfer some of your assets to your children while you are still alive. Once you set up a company, you are able to transfer some of your assets into it. As one of the owners, you will receive ownership interests, which you can give to your children. This reduces the net value of your estate that will be subject to the estate tax. At the same time, you still control your assets as the interests cannot be sold or transferred without your approval.

Contact an Estate Planning Attorney

If you expect your estate to be subject to the estate tax, it is best to first consult a trusted estate planning attorney for advice before settling on any one tool to reduce the size of your estate and the estate tax. Solan, Park & Robello are experienced attorneys practicing in San Fransisco who can offer comprehensive solutions to complex estate planning issues. Contact us today to learn how we can help you ensure a smooth transition of your assets to your heirs with the least amount of estate tax possible.

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Solan, Park & Robello

Solan, Park & Robello is a full-service probate and estate planning firm offering experienced counsel in a wide range of estate planning matters—from preparation to administration to litigation.

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