Ways to Reduce the Tax on a Decendent’s Gross Estate
Estate taxes can be a significant burden to beneficiaries of a wealthy decedent. The amount taxable varies from year to year and always gives the grantor —the person giving the property away— a set amount that can be transferred tax free.
For instance, in 2019, up to $3,500,000 can be transferred with no taxes owed. 2019 will see estate taxes entirely eliminated until 2018, when taxes begin again for estates valued above $1,000,000. This amount will continue to fluctuate, but anyone with a gross estate valued higher than the Congressionally set exemption will benefit from tax reduction strategies.
Spousal Exemption
Property transferred to your spouse at death is nontaxable. Therefore, decedents can save a lot in estate taxes by designating their spouse as the sole beneficiary of their estate. Unfortunately, this means that when the spouse dies, the value of the property will be taxed anyway, provided the amount exceeds that year’s total deduction amount.
This is useful if the gross assets of a married couple are small, but is not an effective long-term tax reduction strategy. A better alternative is to create a credit shelter trust.
Credit Shelter Trust
If a married couple intends for their children to be the ultimate recipient of their assets once they both pass away, a credit shelter trust can be a valuable tax avoidance tool. With such a trust, the first deceased spouse can transfer an amount of property valued below that year’s federal estate tax exemption (so as to pay no estate taxes) into the trust and name his or her children as the beneficiaries.
The surviving spouse would also be granted a life estate in the trust’s assets, meaning that he or she may continue to use the property for the remainder of his or her life. Then at the surviving spouse’s death, the children will have access to the trust’s assets.
This permits the married couple to use the federal estate tax exemption twice, rather than only at the death of the second spouse. While not limited to spouses, credit shelter trusts tend only to be useful for couples with children.
Lifetime Gifts
Perhaps the easiest estate tax avoidance strategy is to make lifetime gifts before death. An individual can give away up to $12,000 a year, while a married couple may jointly give up to $24,000 without incurring any gift taxes. Over the course of a few years, this can greatly reduce the value of the estate and bring the amount below the federal estate tax exemption.
Charitable gifts can also be a valuable estate-reduction strategy. Though it means your heirs ultimately receive less property, charitable gifts serve the dual purpose of benefiting a worthy cause and reducing your estate tax liability.
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