Minimizing Estate Taxes: Some Simple Techniques

As of January 1, 2016, the amount of money which you can leave to your family and friends at death– the “unified credit”– is $5,450,000 at the federal level. This credit may also be used to make gifts while you are alive.  Most states impose their own estate tax and/or inheritance tax so one needs to research what the applicable state exemption is as well.

Of course, the easiest way to reduce your taxable estate is to make gifts of up to $14,000 per person each year. These annual gifts are tax-free and they do not reduce your unified credit amount. You can also make unlimited gifts in the form of medical or educational expenses paid directly to the provider of services or the institution, as the case may be.  Establishing a 529 College Savings Plan, or making gifts to an existing college plan, is also an excellent way of reducing your estate.

Another helpful way of reducing the potential estate tax liability and income tax liability for your heirs is to take larger distributions from IRAs 401Ks, and annuities.  While you will pay the income tax on the distributions, you may be in a lower tax bracket than your heirs.  Additionally, by paying the income tax, you are reducing your taxable estate by the amount of the income tax being paid.

A relatively simple way of reducing your estate tax is to transfer existing life insurance policies into a life insurance trust.  As long as the transfer occurs more than three years prior to your death, the value of the insurance will be excluded from your taxable estate.  If you don’t currently have life insurance, establishing a properly drafted life insurance trust and funding it with insurance, especially a second-to-die policy, may make a good deal of sense.  This will provide your heirs with a large sum of money which will be readily available to pay for estate taxes and other expenses.  Best of all, the money will be tax-free.  

Lastly, when both spouses are alive, preparing wills with “credit shelter trust” provisions can protect your estate by essentially doubling the unified credit. If you properly separate your assets so that the trust is funded at death. If some of your assets include IRA’s or similar retirement funds, special treatment may be required.  

In conclusion, it is crucial to put a comprehensive estate plan in place now, to avoid unnecessary estate taxes. Obtaining advice from an attorney who specializes in the areas of tax and estate planning is key to protecting your loved ones. 

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IRS Circular 230 disclosure: We inform you that any tax advice contained in this communication is not intended or written to be used, and may not be used by your or anyone else for the purpose of avoiding penalties imposed under the Internal Revenue Code.