How to Reduce or Avoid the Estate Tax for Your Heirs

Last will and testament with glasses and penWhen President Trump unveiled his major tax reform bill, it included the goal of eliminating the estate tax completely by 2024. Until then, the estate tax actually only impacts a handful of Americans—fewer than 1% of the population—because only individuals with an estate valued at $5.5 million or higher will have their estates taxed when they die. If your estate is worth less than this, you don’t have to worry about your heirs losing any portion of their inheritance to the estate tax. However, if your estate is valuable enough to make it taxable, here are some tips to either reduce or entirely avoid the estate tax.

Give Gifts

One way to still pass on your assets to your heirs while reducing the estate tax is to give them gifts each year. For the 2019 tax year, you can give up to $15,000 tax-free to any number of individuals. You can do this to reduce the value of your estate over time, until it falls under the estate tax threshold.

For example, let’s say you have four children, and your estate is current valued at $6 million. You can give each child $15,000 per year, reducing your estate value (assuming there are no other changes to your estate) by $60,000 each year. In roughly 9 years, your estate would be worth about $5.4 million, putting it under the estate tax threshold.

However, it’s important to be aware that, depending on the size and frequency of the gifts, the remainder of the estate may still be subject to the estate tax. But even in these cases, your heirs will lose significantly less to taxes than they would have without the annual gifts. And, as an added bonus, you would actually be able to see and enjoy the results of the inheritance you leave before you pass.

Irrevocable Life Insurance Trusts

Most individuals, regardless of their economic status, purchase life insurance as a way of ensuring their loved ones’ financial stability if they pass away. However, in many cases, the value of your life insurance can be added to the value of your estate, making it subject to the estate tax, if the estate value is high enough. (And, in certain cases, the value of your life insurance may even push your estate’s value above the threshold.)

One way to avoid having this portion of your legacy taxed is to set up an irrevocable life insurance trust. Essentially, you would be committing all of your insurance benefits to a trust, and transferring those to a beneficiary. This would mean you’re unable to make changes to the trust without the beneficiary’s consent. However, in the event of your death, your insurance benefits would not be included in the value of your estate.

It is best to do this sooner rather than later though; if you die within three years of setting up an irrevocable trust, the value of your life insurance would still be included with your estate.

Charitable Donations

Charitable donations are another way that you can reduce the value of your estate to either reduce or avoid the estate tax. There are a few ways to do this. The first would be to simply make charitable donations throughout your life, bringing down the value of your estate. While this is the most obvious answer, there are a few others that can be done as a part of your will.

The first is a charitable lead trust, or CLT. This simply wills some of your funds or valuable assets in a trust to a tax-exempt charity upon your death. Any assets included in a CLT are not considered when valuing your estate, and can provide a significant tax break. Whatever’s left in the trust will go toyour beneficiaries.

The second option is a charitable remainder trust, or CRT. This allows you to will a stock or another appreciating asset to a charity of your choice. As long as you are alive, you can continue to earn interest and dividends from that asset, while also avoiding the capital gains tax. When you die, your investment income will be donated to the designated charity and lower your estate tax burden.

There are a few other options available to you to reduce your estate tax burden. So, if you have a high-value estate, and you’re worried about how much of it will be lost to taxes, contact us today. We’ll see how we can help you reduce your estate taxes, so more of your estate goes to your loved ones.