Ten Ways to Legally Reduce Your Estate Tax Burden

By | August 5, 2011

The estate tax is often a tax many people don’t worry about – that is, until they finally sit down and try to figure out how much they’ll be leaving behind. The federal estate tax can take around half of what you leave behind. That’s right: half. For many people, estate planning means circumventing this tax legally so they can maximize how much they leave their family and friends after they’re gone.

But how, exactly, can this be accomplished? There are a number of strategies that people use. We’re going to explore ten such strategies in this article, offering an introduction into each. Do your best to see which solution might work best for you – and then continue researching this topic until you’re sure it’s for you.

#1. Giving family members a gift. Many people circumvent the estate tax burden simply by giving away much of their money while they’re still with us on earth – and one such way to do this is to give each family member a gift. There is, of course, a separate gift tax that you’ll have to worry about, but generally if you give a gift within a certain range, you’ll be able to avoid this gift tax altogether. Many people like this option because it allows people to share what they have while they’re still with us. Repeat gifts can also be made in order to add to the amount that’s left behind.

#2. Creating a trust fund. Creating a trust is a great way to avoid an estate tax because, technically, the money you use to fund the trust isn’t yours anymore. And what’s not yours – well, that’s not going to be taxed as if it’s yours, is it? Of course, the art of setting up a trust to leave money behind can be a complicated one, so this is something you’ll want to bring up with your estate planning lawyer or tax attorney during your next meeting. But it’s certainly an option worth looking into.

#3. Investing the money. Remembering that a key theme is to move money around so that that money is not applied to the estate tax, some people will simply choose to leave behind a strong legacy by investing their money wisely. For example, a parent that is going to leave a business behind to his or her child might invest more money into the business so that it’s stronger when the child takes over. There are a number of indirect ways of leaving money behind, of course, but few are as efficient as sound investment.

#4. Leaving money to a spouse. Leaving money to a spouse  means that the money is left behind tax-free. The spouse might then be able to dole out the money in a manner we’ve already stated, such as creating trusts, giving gifts, etc. This is a common way to leave behind money without letting the government get at it, but in many cases this might be the wrong solution because of internal family rifts and the age of the spouse in question.

#5. Giving money to charity. Charitable donations are often tax-free and tax-deductible, which makes them highly efficient ways to leave behind a legacy and avoid Uncle Sam.

#6. Decrease the value of your estate. The estate tax generally kicks in heavily when you have a large estate to leave behind. But if you leave behind a smaller estate – and this figure varies according to the year in which you die – you’ll be able to leave tax-free money behind. Of course, you don’t want to sabotage yourself; you should simply move money around so that your own estate technically isn’t worth as much. This is a good option if your estate is already teetering on the estate tax line.

#7. Drafting a will. Say what you want, but drafting a will and making sure it doles out money in a clear and efficient way can save more on taxes – and save more headaches – than you might imagine. Simply consulting a lawyer who’s experienced in drafting wills can save you a lot of money.

#8. Ensuring that the money is not contested. Your goal, after all, is to ensure that your children receive a lot of money after you’ve passed. They receive less money if they have to contest the money you leave behind. So be clear in your will about who receives what – and be upfront with your children about it as well.

#9. Take proper inventory of your estate. Understanding the size of your estate is the first step in ensuring that your estate planning goes off without a hitch. You don’t want to create great plans only to see them rendered invalid!

#10. Make sure your estate plan is in good hands. The attorney you work with in drafting a solid will and estate plan will be crucial to ensuring its success in avoiding taxes. Choose wisely.

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