Recently, the topic of wills and inheritance has come up a lot in my life, in discussion with others. One thing, though, when people talk about inheritance, is that often the aspect of estate taxes doesn't get brought up. Yes, the government takes a huge cut out of whatever is left in people's wills. Therefore, smart planning ahead can ensure that the government gets as little as possible and the most will go to your loved ones. This post from a reader is filled with some good ideas as to how.
So, if you don’t want your estate taxes to be a burden, keep reading this article to learn how to manage them efficiently.
What Are Estate Taxes?
In simple terms, an estate tax refers to a tax charged on a dead person's estate or property. It’s typically considered a levy on a person’s estate whose overall value exceeds the limit set forth by law. Assessed by the federal government, this type of tax is computed based on the estate’s fair market value and not the amount of money the owner originally pays for all their assets.
However, you should remember that estate taxes can be expensive and they should be paid in cash, usually within nine months following your death. And, since most estates have the cash, it’s required to liquidate some of your assets to pay off your estate tax liability to the government. On the other hand, if you want a more in-depth understanding of how estate tax planning works, you can check some reliable websites online to learn more valuable information.
Tips For Managing Estate Taxes
Now that you’re aware what estate taxes and inheritance tax are, the next step is to familiarize yourself with how you can manage them for the benefit of your beneficiaries. Generally, if you don’t plan your estate properly, you’ll end up paying hefty estate taxes, which, in turn, can impact your beneficiaries’ share of the estate. Luckily, there are plenty of ways to help you manage and reduce your estate taxes, such as:
1. Removing Assets From Your Estate
One of the common ways to manage and minimize your estate taxes is by removing some of your assets from your estate before you pass away. You can do this by spending some or making some gifts to certain individuals who are dear to you to lower taxes on your estate upon death.
When choosing the assets to take out from your estate, you may want to consider some of your appreciating assets because any appreciation in the future will not be included in the computation of your estate tax liability. Thus, if you want your taxes to stay in the minimum and protect your assets for your loved ones, be sure to reduce the size of your estate during your lifetime.
2. Making An Irrevocable Life Insurance Trust
Aside from removing some of your assets from the estate, making an irrevocable life insurance trust can also be a great estate tax planning strategy to manage your estate taxes. Meaning, you should take out the value of your life insurance from your estate so that the death benefits included in the policy will no longer be part of the computation of the estate taxes.
Typically, an irrevocable life insurance trust is a legal document that enables the insured to make periodic payments of a certain amount to the trust's beneficiary. The payments are made to the beneficiary without interference from the insurer. This is one reason why some people choose to use irrevocable life insurance trusts as an estate tax planning strategy. They allow their beneficiaries to choose to keep the money in the trust as their own if they want to. Also, since this kind of policy is not subject to inflation, it provides a steady stream of income to your heirs.
3. Establishing A Grantor Retained Annuity Trust (GRAT)
If you’re looking to properly manage your estate taxes, it’s best to plan for it by getting a GRAT or grantor retained annuity trust. It’s a type of trust that allows you to transfer an income-generating asset to a trust account for a specific number of years, thereby taking them out from your estate. When the trust comes to an end, the assets will be transferred to the beneficiaries.
Also, creating a grantor retained annuity trust comes with different benefits. It can help you avoid tax liability on the GRAT and can save some amount of money if your beneficiaries would need it for their dependents' education or medical treatment. And, by getting a GRAT, you can make sure that you can pass on your legacy to your beneficiaries and avoid paying the estate tax when you die.
4. Having A Qualified Terminable Interest Property Trust
A qualified terminable interest property trust is a great way to ensure that your loved ones are covered from a large amount of estate taxes. The trust itself is what will be responsible for managing your tax obligations, paying your taxes on time and making sure that you don't fall into bankruptcy and other traps. These are all very important issues when it comes to protecting your spouse and children after your death.
Conclusion
The estate tax can be the single largest tax liability for many individuals, especially in today's economy. This tax could result in a large financial penalty, along with other serious tax issues, like loss of assets.
But, with the use of some estate tax planning strategies mentioned above, you can protect the beneficiaries of the estate from such taxes. And, to help you get the most out of these methods, hiring an estate planning lawyer can be an excellent option. With them on your side, you can efficiently prepare your estate and minimize the payment of estate taxes before you die.