Estate Taxes

Lower Estate Taxes

While trusts can help reduce estate taxes, there are also a few other ways to lower estate taxes. Learn these methods here.

Lower estate taxes are a goal of many people. If you would like lower estate taxes, you can decrease them in a variety of ways. You can lower estate taxes through trusts (See the article on reducing estate taxes through trusts to learn more), or you can do so in a few other ways. Below are some of the ways that you can lower estate taxes that may be due on your property.

Lower your estate through gifts:

If you’re concerned with your estate being subject to estate taxes, you can give pieces of it away during your lifetime to lower those estate taxes. The Unified Gift and Estate Tax allows you to give up to $11,000 annually to one individual. This rate is indexed to account for inflation. It rises in $1,000 increments as the cost of living increases.

If you are married, you and your spouse can give up to $22,000 in cash or property to one individual every calendar year. There is no limit to how many gifts you give in any calendar year as long as you don’t give more than $22,000 to one individual. In other words, if you are married, you can give $20,000 to each of your five children every year without your kids owing the gift tax. There’s no estate tax on this money, either, since it no longer belongs to you.

Any gift you give to your spouse is gift-tax free, as long as the spouse is a United States citizen, and these gifts can help lower estate taxes. The limit on gifts to a non-citizen spouse is currently $112,000. If your surviving spouse is not a citizen of the United States, he or she may not qualify for the unlimited martial deduction provision. Many estate planners recommend setting up a qualified domestic trust that allows for the non-U.S. surviving spouse to receive the deduction. Several provisions must be met before a qualified domestic trust can be set up, and you may not need one at all depending on your spouse’s citizenship. The U.S. has estate tax treaties with several countries. Work closely with your attorney to make sure your non-citizen spouse doesn’t lose the deduction.

You can give percentages of property as gifts, too. Say your family has a summer home at the beach that is worth, at fair-market value, $1 million. You’ve got $500,000 in equity in the home. You want to leave the house to your daughter, but want to avoid estate taxes. You and your spouse can give interests in the property to your daughter and her husband every year. So, once a year, your wife gives $11,000 of the value of your beach house to your daughter and another $11,000 to your son-in-law, and so do you. That’s $44,000 a year that is gift tax-free, and over a period of years will significantly lower the value of your estate, which can lower or eliminate estate taxes your daughter will have to pay.

What parts of your estate should you give your heirs while you are alive? Give away anything that could significantly increase in value, like real estate or stocks. Since the amount of your estate will be calculated by fair-market value, it’s wise to give anything that could increase in value so significantly that it would drive up the value, and would therefore drive up the estate taxes.

If you need to lower the value of your estate quickly to reach lower estate taxes, you can enlist the help of other trusted family members. Here’s how it works: Let’s say Brian has been diagnosed with terminal cancer and determines his estate will exceed 1.5 million by $220,000. He gives $11,000 to each of his children and their spouses, for a total of $88,000. Brian also gives $11,000 to each of his brothers and sisters and their spouses, plus his late wife’s siblings and their spouses, totaling $132,000. That eliminates $220,000 from his estate. Brian gave the money to the siblings and in-laws with the understanding that they immediately give it to his children, which they can do since they too can give up to $11,000 to anyone without a gift tax. So the kids end up with the $220,000 without paying gift or estate taxes. It is important, though, that you only use this method of lowering estate taxes with very trusted family and friends.

You can give gifts to minor children or grandchildren, too, by setting up custodianships or irrevocable children’s trusts and naming an adult to administer the funds. Talk to your attorney about your state’s laws regarding transferring large gifts to minors.

Lower estate taxes through Family Limited Partnerships:

Family Limited Partnerships are set up to shelter a family’s business assets from liability and to reduce the fair market value of the assets so you can hold more wealth without paying estate tax. In essence, the trust owns a piece of your family business, which lowers the value of your estate, and therefore lowers estate taxes due on that estate. Here’s how it works: William and Liz co-own three rental properties with their children Beth, Natalie, Bill and Tim.

The properties are worth a combined fair market value of $1 million. William and Liz set up a Family Limited Partnership for their portion of the interest in the property. The trust now owns a fifth-interest in the properties, or $200,000. When Bill and Liz die and the trust is left to the children, the fair market value of the $200,000 interest in the rental property held in the trust will be a lot less because few people are willing to invest in someone else’s family business. It may worth as little as $20,000. Bill and Liz’s estate value is lowered by $180,000.

As you can see from the above information, there are many ways to lower estate taxes legally; you just have to be informed about them. If you believe your heirs will owe estate taxes upon your death, you should consult with an estate planning attorney to try to lower those taxes beforehand.