Estate tax is a subject that many people are interested in but are possibly confused about the responsibilities and ramifications of such a tax. The money owed on assets when a person dies is different from probate expenses and final income taxes. This additional tax can be very expensive to those who are left behind.
Estate Taxes may apply to your estate when you die IF you have not planned ahead. They will be assessed on the value of your total estate (gross Estate), less the allowable deductions. Funeral expenses paid from the estate, debts you owe at the time of your death, and the marital deduction, or the property that passes to your spouse at the time of your death, will diminish the total amount of the value of your estate. What is left will be your taxable estate and this can be taxed up to 46%, but there are three good strategies you can use to reduce or eliminate Estate Taxes.
First, if you are married, use both spouse’s exemptions. This one thing will immediately protect double the amount (up to $4 million until 2008) from estate taxes.
The second thing you can do is to remove assets from your estate. You can do this by putting assets into a separate Trust or you can make Annual Tax-Free Gifts. Tax-free gifts are currently up to $12,000 per year ($24,000, if married) per recipient. Plus, you can make unlimited gifts to charities and for medical or educational expenses, paid directly to the provider. Trusts included for removal of assets are a Revocable Trust, Irrevocable Trust, Qualified Personal Residence Trust, Annuity Trust, Charitable Remainder Trust and a Charitable Lead Trust. Other strategies within this exemption may be to form a Family Limited Partnership or a Limited Liability Company.
A third approach is to buy Life Insurance. Through an Irrevocable Life Insurance Trust, Death Benefits are not included in your estate. This can be an inexpensive way to pay your Estate Taxes.
Of course these are all good ways for your heirs to legally avoid paying taxes on the estate you leave behind, but you must plan carefully first. The laws on amounts and benefits change all the time and it is a good idea to speak with an Estate Planning Attorney.