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How to Lower Your Estate Tax

Updated on May 10, 2011

Estate tax, sometimes also known as inheritance tax or death tax, can be a substantial cost for the recipients of your assets after you die. The amount you have to pay in tax changes from year to year, but you always receive an amount that may be given tax-free. In 2009, this amount about $3.5 million. In 2010, this amount was unlimited (i.e. individuals could transfer all of their wealth and pay no inheritance tax). In 2011, the tax-free amount is $1 million. This amount will continue to change yearly, but no matter the yearly exemption, there are always ways to reduce the amount you pay in estate tax, inheritance tax, or death tax.

Spousal Exemption

All of the assets you transfer to your spouse when you die are nontaxable. You can save a lot in estate taxes by naming your spouse as the only beneficiary to your estate. The disadvantage to this plan, however, is that when your spouse dies, the value of the assets you gave her will be taxed anyway. If the combined assets you and your spouse share are small, this may save you money. However, for individuals with combined assets that exceed the tax-free threshold, consider making a credit shelter trust.

Credit Shelter Trust

If a couple wants their children to receive all of their assets after both of them pass away, use a credit shelter trust to avoid taxes. This type of trust allows the first deceased spouse to transfer property that intentionally falls just below that year's federal estate tax exemption to a trust. Because the amount falls under the estate tax exemption threshold, no taxes will be paid on the money transferred to the trust. Create the trust with the surviving spouse having a life estate in the trust's assets. This means that she will have access to the property for the rest of her life. Then, name your children as the beneficiaries to the trust. When your spouse also passes away, the assets remaining in the trust will pass automatically to your children without any additional taxation. Additionally, your spouse's assets will pass to your children with the benefit of an additional federal estate tax exemption.

In other words, if you die in 2011 and leave $990,000 in a credit shelter trust (just under the $1 million amount that would trigger estate taxes), and then your spouse passes away that same year and gives another $990,000 to your children, your children receive $1,980,000 (almost double the yearly exemption) without losing anything to estate tax.

Contact a lawyer or accountant to set up this type of trust.

Lifetime Gifts

The most simple way to avoid paying estate taxes is to limit the value of the assets that end up going into your estate. This means making gifts during your lifetime. You're allowed to give away $13,000 every year to a single individual without having to pay any gift tax. If you are married, you and your spouse may give a combined $26,000 to any single individual without paying taxes. After a few years, this can have an enormous effect on reducing the value of your estate, which may potentially bring it below the federal estate tax exemption amount.

If your assets are particularly large, making charitable gifts before your death will also help save estate taxes. Since there is no limit on the amount of charitable giving you can do, it is a quick way to reduce the amount of taxable assets you leave behind, which may bring your estate below the exemption amount. With a well-planned giving strategy, you can bring your estate right below the exemption threshold and leave your beneficiaries paying nothing in estate tax.


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