Giving gifts and using irrevocable or charitable trusts to pass on a portion of your assets helps you lower or altogether avoid hefty estate taxes.
The estate tax is a tax levied on the net value of the estate of a deceased person before his assets are distributed to the heirs. By decreasing the net value of your estate via the smart use of trusts and gifts, you decrease your tax liability. Estate-planning experts understand how to create a strategy that passes more of your assets to your heirs and less to Uncle Sam. Regardless of how tax laws may change in Congress in coming years, having an estate plan and updating it regularly is critical. A smart plan implements tools, such as trusts and life insurance, to reduce or even eliminate the estate tax and sidestep financial strife and bitter arguments between beneficiaries. Current law only taxed individuals with more than $5 million. Couples can shelter $10 million in assets from estate taxes. Therefore, only very wealthy people need to be concerned with avoiding estate taxes.
Gift-giving: A Way to Reduce Estate Tax
Giving away money during your lifetime decreases the value of your taxable estate. How this works: You’re allowed to gift as many individuals you like, up to $13,000 each year without tax consequences. However, monetary gifts over $13,000 are subject to the gift tax. You get gain a tax credit, though, that allows you to give away up to $1 million during your lifetime without taxation. When you pay someone’s higher education or medical expenses directly, there is no limit on how much you can give. Those who are not taxable should consider the possibility of the need for long term care. If you or your spouse needs nursing home care, often Medicaid is the best way to pay for a skilled nursing facility. Gifts can cause Medicaid ineligibility periods which can cost seniors thousands of dollars in private pay to the facility.
Trusts Earn Interest and Disburse Annual Payouts
Trusts, one of the most popular tools for lowering your net value to reduce estate-tax liability, can cost anywhere from $2,000 to $20,000 to set up, with most averaging $2,000 to $5,000. While setting up an irrevocable trust is pricey, it’s also complicated. The most attractive form is the grantor-retained annuity trust, or GRAT, which entails the transfer of assets to a trust that usually lasts five years. You receive annual payments from the trust, based on an interest rate the IRS establishes. Payments are calculated so that the GRAT zeroes out by the end of the term. What this means is you will have received your deposited assets back plus interest. Any appreciation above the interest rate can go to the beneficiaries of the trust. Giving money to your favorite charity through the use of trusts also cuts your estate tax liability. In a charitable remainder trust, or CRT, donors receive annual disbursements from the trust until the end of the term, at which point the charity receives the balance.