When you begin creating your estate plan, there are several major issues to consider. One of these issues involves federal estate and gift taxes. With the current tax rate of 40%, large estates can incur a significant tax liability after death. Fortunately, there are various techniques you can use when you create your estate plan in order to minimize this potential tax burden.
5 Potential Techniques for Reducing the Size of Your Estate
It’s important to understand what you can do to minimize estate taxes when you create your estate plan. Here are five ways you can reduce these taxes:
- Making tax-free gifts during your lifetime. Each calendar year, you can give up to $14,000 per recipient without incurring any gift tax liability. In addition, you can pay an unlimited amount of another person’s tuition or medical bills or make donations to charity. By making these gifts, you reduce the overall size of your estate without incurring gift tax liability. Your attorney can assist you in incorporating gifting strategies into your estate planning.
- Creating a trust where you leave property to your children but give your surviving spouse the right to use it during his or her lifetime. The purpose of this type of trust is to reduce the overall size of taxable estate of the last spouse who dies. Since the current estate tax exemption is so high, and due to the availability of something known as “portability,” these trusts are not as common as they once were. However, for some families, it may still make sense to utilize this type of trust. It is important to consult with an attorney who can help walk you through the pros and cons of using what’s known as an AB or bypass trust.
- Create a Qualified Terminable Interest Property, or QTIP, trust. A QTIP trust allows spouses to postpone the payment of estate taxes until the second spouse dies. But like the AB or bypass trust, this type of trust is utilized less often under current estate tax laws.
- Create a charitable trust. This type of trust is used by those with large estates in order to make sizable gifts to tax-exempt charities. As a result, the size of the estate is significantly reduced.
- Create a life insurance trust. By creating a life insurance trust, the value of the life insurance proceeds is removed from your estate. This type of trust must be carefully drafted and administered with the guidance of an experienced legal professional in order to accomplish your estate tax savings goals properly.
If your estate requires estate tax planning, it is important to seek guidance from an experienced attorney. We encourage you to reach out today for more information at 714-459-5481.