The old saying is true: The only two certain things in life are death and taxes. Even after you are deceased, you technically still owe the previous year’s income tax. There is also one more kind of tax that you must pay after your death: The estate tax.
The estate tax is a certain type of tax that is incurred by your estate after you pass away. It can include all of your assets, property and real estate. Taxes may be one of life’s certainties, but there are steps that you can take to reduce your estate tax as much as possible.
1. Marital transfers
Even though your estate will be taxed in its entirety, transfers to your spouse are not taxed immediately. This is one helpful way to defer estate taxes.
2. Lifetime gifts
You can give up to $14,000 per year to any individual without having it taxed. Therefore, spouses can collectively gift up to $28,000 per beneficiary per year without incurring any tax.
3. Uniform transfer to minors
A uniform transfer to minors is a way of gifting money to someone who is underage. The gift is granted to a custodian until the minor comes of age.
4. Various trusts
There are a few different types of trusts, such as AB trusts, QTIP trusts and irrevocable life insurance trusts, that can help defer or reduce estate taxes.
5. Family limited partnership
Families can transfer the ownership of a family-owned business to the next generation and pay lower taxes on it by using a family limited partnership.
6. Private annuity
You can sell an asset to a younger generation with an agreement to pay annual amounts to the seller. The payments made to the seller will be part of their estate, but the asset will not be included.
7. Qualified family-owned business interest
A family-owned business can be deducted from an estate if it meets a certain set of statutory requirements.
8. Special use real estate valuation
Rather than being evaluated at its “highest and best use” value, sometimes a piece of real estate can instead be valued at its “actual use” price, which could be much lower and would incur lower taxes.
9. Charitable gifts
Finally, you can make charitable transfers to a good cause that is close to your heart, your generous gift will not be subject to estate taxes.