Legal Ways to Escape Estate Taxes

Even though the federal government increased the estate tax exemption slightly for 2013, estate taxes can still take hundreds of thousands or even millions of dollars in value out of a high-value estate. The current federal exemption for 2013 is $5,340,000. This means that all estates valued below this amount are exempt from any tax. If there is an estate valued above this amount, then there are certain legal ways to lower or reduce the amount of tax owed.

Maximize the Marital Deductions

Estate tax exemptions are calculated individually, this means that for a married couple, each person has an exemption tied to their name. Often, this double exemption is never applied, because when one of the married individuals dies, the estate assets pass automatically to the spouse and are never taxed, but then they are taxed when the surviving spouse dies using only that person’s exemption. This was slightly corrected in 2011 when congress declared that unused exemptions can be passed to the surviving spouse, but the strategy for avoiding the tax may still apply.

Use a credit shelter trust. This form of trust transfers any number of assets, usually up to the value of the exemption, into a credit trust fund. This means that the assets become liability on a credit amount that the trust beneficiary can receive periodic cash payments from. The beneficiary can also request a principle payment. The assets are later liquidated to pay off the credit. The trick is that trust assets are not included as part of the estate for tax purposes, so they can effectively lower the value of the estate without the selling of any assets that would trigger capital gains tax and will preserve the estate’s value for other inheritors.

Sell Off Assets

While it may seem obvious, one of the best ways to avoid estate taxes is to lower the value of the estate by selling assets before the tax is due. Non-taxable gifts can be made to any individual up to $13,000 per individual per year. This can really add up when the funds are dispersed to children and grandchildren. With a little early planning, this is an effective way to disburse estate funds to those who will end up as beneficiaries of the estate anyway.

Any assets that can be liquidated can also be placed into other types of non-taxable trust funds, and there are a variety of them that can be explored. It is important to consider liquidating all possible assets because estate taxes must be paid in cash, so this usually means the estate assets must be liquidated anyway if taxes are due.

An Irrevocable Life Insurance Trust

This is a special type of life insurance that has a disbursement amount not included in the estate. With this type of life insurance, a trustee is the actual buyer of the policy, so it is not owned by the estate owner and is not included in their estate.

Following these tips can lead to a great amount of savings on estate taxes. A complicated estate situation should probably be overseen by a professional to help maximize tax savings.


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