The act of giving away your property, either during life or at death, will probably be subject to one or more of several types of taxes (collectively referred to here as estate taxes), either on the federal level, state level, or both. These tax liabilities may be the largest potential expenses you or your estate may have to pay; federal estate tax alone may reach as high as 40 percent of your estate if you die in 2018. This also means that property you intend to go to your loved ones or others when you die may go instead to the IRS or to your state. Therefore, understanding how these taxes can be minimized is vital if you want to preserve your estate for others.
How do you minimize estate taxes?
You can minimize estate taxes by: (1) taking advantage of certain allowable tax exclusions, deductions, and credits, (2) using an estate freeze technique, or (3) employing post-mortem planning.
Exclusions, deductions, and credits
Under the federal tax system, individuals are generally allowed to make gifts of up to $15,000 (in 2018, $14,000 in 2017) per donee each year gift tax free under the annual gift tax exclusion.
In addition, individuals are allowed to exempt a certain amount of property from the gift and estate tax.
Further, transfers of property between U.S. citizen spouses are fully deductible, as are transfers of property to qualified charitable organizations.
There are many exclusions, deductions, and credits that if effectively used can minimize estate taxes. You need to understand what these exclusions, deductions, and credits are, and how they work in order to take full advantage of them.
States also have their own exclusions, deductions, and credits, although they may not be the same as the federal system.
Estate freeze
An estate freeze is any planning device that allows you to freeze the present value of your estate and shift any future growth (or potential growth) to your successors
You give land valued at $100,000 to your children. Twenty-five years later, you die. The land is valued at $500,000 on the date of your death, but only $100,000 is included in your taxable estate because the value of the land froze on the date you gave it to your children.
There are many ways you can freeze the value of property. Estate freezing techniques range from relatively simple (e.g., installment sale or private annuity) to the more complex (e.g., gift- or sale-leaseback). You need to know what these techniques are and how they are used in order to know which, if any, is best for you.
This generally works for state taxes also.
Post-mortem planning
There are many post-mortem (i.e., “after death”) techniques that can help keep the value of your property as low as possible in order to minimize federal estate taxes. There are a number of post-mortem techniques that you should know about. Even though these techniques are implemented after your death, you should understand each of them now because if you believe your estate might benefit from them, there may be things you need to do now to ensure that your estate will qualify for these elections after your death.