New Estate Tax Tips

When planning your estate, finding out a way to keep taxes for your loved ones as low as possible will ensure that your family gets the maximum amount of benefit after your passing. Estate laws can be a little tricky and confusing. So here are a few ways you can help manage estate taxes better:

Reduce the impact of estate tax

Did you know that money and property inherited by your loved ones can be taxed? The general exception to this rule is life insurance policies which are not taxed. Although you may be taxed if you invest life insurance benefits and earn interest. Purchasing enough life insurance to offset estimated estate taxes will ensure that your beneficiaries received all that you intended.

Another way to reduce taxes on estate inheritance is to gift some of the inheritance to the beneficiary. You can gift a maximum of $14,000 per individual, per year, before it is considered taxable income. This gift does not go towards the $5.43 million tax ceiling. You could easily reduce your taxable estate by several hundred thousand dollars of the course of a few years.

Understand allowable deductions

Simply understanding a few basic estate tax laws can save you a lot of headache and a lot of money. A few things you need to know include:

Unlimited Marital Deduction:  Any amount of money you leave your spouse (so long as they are a legal U.S. citizen) cannot be charged a federal tax. This exemption is referred to as the marital deduction privilege. The amount of non-taxable income may vary each year, so make sure you talk to a tax specialist to make sure you are covered.

Donate to the right charities: You can help reduce tax responsibilities by donating some of your estate to IRS-approved charities. The current tax-free ceiling is $5.43 million, or $10.86 million if you leave everything to your spouse (including your own exemption). If you can donate enough funds to reduce your total assets to less than the maximum amount, you will not have to pay any taxes.

The irrevocable life insurance trust

As previously mentioned, most life insurance benefits are free from federal income tax. But, there are some rules that would allow this benefit to be included in your taxable estate. If you have any “incidents of ownership” the policy may be included as part of your estate. Common “ownerships” include the option to change beneficiaries, option to cancel, and the ability to select payment options.

To avoid this, you could set up an irrevocable trust to own the policy, instead of you. Because the policy is technically owned by the trust it cannot be used as part of your estate. You must live for at least three years after transferring ownership of the policy, and paying your annual dues can be tricky if you want to avoid ownership and taxation.

Consult a professional when it comes to these matters. Estate planning in itself can be very tricky. When you are trying to minimize taxes on your estate, it can get even foggier. Working with a professional will allow you to take advantage of all tax breaks possible without driving yourself crazy.

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