Why do you want to avoid estate tax? The answer to that question might start with another question…what is estate tax?
The estate tax is defined as a tax on your right to transfer property when you die. The fair market value of everything you owned at the time of your death is assessed. The total of all these items is your “Gross Estate.”
After all of the calculations, estate tax may put a large dent in what you planned to leave your loved ones. If you take steps now to minimize the tax hit, your loved ones will get the most out of what you have left for them.
Keep reading to discover the best strategies to avoid estate tax and preserve your wealth.
Gifting to Avoid Estate Tax
You get $10,000! You get $10,000! Giving away your money while you’re still living is one way to avoid the estate tax. There is a catch, however. The annual gift tax exclusion only allows you to give up to $15,000 per person per year without reporting the gift.
Married couples can give away $15,000 each making the total $30,000 per person per year.
Using Real Estate to Avoid Taxes
Fund a qualified personal residence trust (QPRT) by transferring the ownership of your home into a trust. You continue living in your home for the term of the trust. Once the term ends, the beneficiaries can take over the property.
Through this type of trust, you can freeze the home’s market value and avoid paying the gift tax. If you should die before the end of the trust’s term, the home is still considered part of your estate and is subject to the estate tax.
Create an Irrevocable Insurance Trust
When your life insurance proceeds become part of your estate upon the event of your passing, they are subject to the estate tax. To avoid having that money taxed, you can set up an irrevocable life insurance trust.
Upon setting up this trust, you’re transferring ownership of it to someone else. It’s irrevocable because you are not able to make adjustments to the trust without the consent of the beneficiary.
By doing this, your death benefits are not included in your estate. This goes into effect three years after making the transfer so if you pass before the three-year mark, the life insurance proceeds are still considered part of the taxable estate.
Thinking about estate planning? Learn the advantages of having an estate plan regardless of how much you own.
How to Avoid Estate Tax
Now that you know the best way to avoid estate taxes, you can protect what you plan to leave to your loved ones when you pass. If you’re looking for someone to help with estate planning to avoid taxes, seek a professional with experience to help you keep more of what’s yours.
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