Last week we looked at a couple of basic estate tax planning tips that almost everyone can take advantage of. This week we thought we would expand on the idea of estate tax planning by looking at some additional strategies that might be useful to you.
When talking about estate taxes, it’s important to remember that the issue is often a complicated one, and developing an estate tax plan is something that you should only do with the advice and guidance of your attorney. Many of the estate tax planning strategies available today are rather complex, and you need to speak to your attorney for advice if the estate tax is something you are worried about.
Estate Tax Planning Tip: Develop a gift plan.
One of the most effective strategies for reducing the amount of estate taxes your estate might have to pay is to develop a comprehensive gift-giving plan. The IRS allows each individual to give other individuals up to $14,000 per year as a tax-free gift. If you give people gifts, and make sure those gifts are under this $14,000 per year limit, the amount you give will not be counted against you when it comes time to calculate your taxable estate. Further, if you are married, you can effectively double the amount you can give every year to each individual, meaning you can give up to $28,000 per year tax-free.
So, with the gift-giving plan, you can use this tax-free gift ability to effectively reduce the size of your taxable estate. For example, if you and your spouse give the maximum allowable gift to five individuals each year for 10 years, you will give away $1.4 million in tax-free gifts.
Estate Tax Planning Tip: Use trusts.
Another effective way to reduce the amount of money your estate might have to pay in estate taxes, or even eliminate any estate tax liability, is to use one or more types of trusts. Now, not every trust will give you tax mitigation benefits, but some of them do, and often in surprising ways.
Take, for example, the irrevocable life insurance trust. For people who have a life insurance policy, such as one with a large death benefit, developing an irrevocable life insurance trust is often one of the most effective ways of reducing your taxable estate.
With an irrevocable life insurance trust, you effectively create a trust that will own your life insurance policy and distribute its payout after you die. This way, the payout is not included in your estate, and won’t be subject to estate taxes.
Of course, this is only one of the many kinds of trust you can use when creating an estate tax plan. Your estate planning attorney can tell you about many more.