If you plan on leaving a sizable amount of money to your heirs, it’s understandable to be concerned about estate taxes. After all, the top Federal estate tax rate of 40% could take a nasty bite out of a multi-million dollar estate, and that’s not including any state taxes that may apply. With that in mind, here are three suggestions from our contributors that could help you lower the estate tax’s burden on your loved ones. The estate tax only applies to amounts left to heirs in excess of the lifetime basic exclusion amount, which is $5.43 million for 2015. This includes all taxable gifts given during the person’s lifetime. For example, if a wealthy individual dies and leaves an estate worth $10 million to heirs, the amount subject to taxation is $10,000,000-$5,430,000 = $4,570,000.
The Motley Fool’s article, “3 Smart Strategies Designed to Reduce or Eliminate Estate Taxes,” talks about how the annual gift exclusion lets you pass some of your estate on to your heirs tax-free while you’re still around. You want to decrease the value of the estate, and the gift exclusion lets you give money away to your heirs every year.
Because your home may be your biggest asset, you may want to reduce the amount of estate tax you pay on your home, which will be a money-saver for your family. One strategy uses what’s known as a Qualified Personal Residence Trust (or “QPRT“). To use the QPRT, you would transfer your home into a trust and designate the length of the trust and the recipient of your home when the trust ends. The QPRT lets you keep living in your home during this period. Although you still have to pay real-estate taxes and insurance, you get the income-tax benefits of home ownership. After the trust ends, typically you can still live in your home, but you’ll have to pay fair-market rent to the beneficiaries at that point moving forward. The QPRT is a highly specialized strategy, but you may want to look into it with the help of an experienced estate planning attorney.
State Estate Taxes. Where you live has a lot to do with the amount of your taxes and how much of your wealth ultimately gets transferred to your beneficiaries. Right now there are 15 states and DC that have an estate tax. Luckily, Georgia is not one of them. Every state can have a different minimum and maximum tax threshold and differing exemptions.
If you live in one of these 15 states with an estate tax, you should talk to your estate planning attorney about the type of tax liability your estate could face in the future.
Reference: The Motley Fool (October 3, 2015) “3 Smart Strategies Designed to Reduce or Eliminate Estate Taxes”