Estate tax laws in the United States and its territories are constantly in a state of flux, so it might seem difficult to create an estate plan that avoids or minimizes the amount of taxes to which your estate will be subject. However, keep in mind that the minimum estate value for paying estate taxes to the U.S. government is very high as it is, as they only apply when the estate is worth more than $5.45 million.
If you do have a large, valuable estate, here are some tips that can help you to increase the amount of assets you can pass to your beneficiaries without having to worry about costly estate taxes:
- Leave all of your assets to your spouse: The exemption amount excludes any assets you leave behind to your spouse. You are allowed to leave your entire estate to your spouse under federal law without being subject to taxes. However, once your spouse dies, the exemption amount still applies, so this tactic is more used as a means to delay these estate taxes than to entirely avoid or minimize them. Still, it can be a sensible “first line of defense” against estate taxes.
- Put assets into irrevocable trusts: Assets placed into revocable trusts are still taxable if they exceed the exemption amount, as a revocable trust is merely an extension of the grantor. Irrevocable trusts are different because the grantor gives up control of the trust assets, as ownership is technically passed to the trust. This means that any assets placed in that trust go to beneficiaries without being subject to taxes.
- Being smart with beneficiary choices: Estate taxes depend entirely on your estate’s value. Retirement accounts and insurance policies could impact your estate taxes, so you might consider designating beneficiaries aside from your estate for these types of accounts.
- Downsize: You may effectively decrease your estate’s value to minimize estate taxes or get your estate below the exemption limit. Keep in mind that the Internal Revenue Service has rules governing how much you can give to beneficiaries within a given year, so you if you are not aware of these rules, you could still be subject to gift taxes.
- Look into other trusts: There are a number of other types of trusts that can help you protect your assets and avoid estate taxes. A knowledgeable attorney will provide you with more information on the options available to you based on your personal circumstances and objectives.
Every individual’s estate is different, which means it’s best to seek the assistance of an experienced estate planning attorney to help you decide the best ways to minimize or avoid estate taxes for you and your loved ones.
Steven K. Hardy is Chair of the BoltNagi Corporate, Tax and Estate Planning Practice Group. BoltNagi is a respected and well-established tax and estate planning law firm serving clients throughout the U.S. Virgin Islands.