Passing on money, property and other assets to family members is a great way to ensure they are financially secure. However, people will want to be sure the tax levied on their estate is as small as possible.
Create an irrevocable trust for life insurance policies: Most people have life insurance policies to provide their families with financial security when they pass away, and the policyholder will have this insurance included in his or her estate. By creating an irrevocable trust, the policy can be removed from a person’s gross estate, which reduces the potential estate taxes.
Consider generation skipping: If allowed, generation skipping can save people money on estate taxes. This gives people the ability to transfer a portion of their assets to their grandchildren as opposed to their immediate children, which saves them from being taxed twice. Without generation skipping, assets would be taxed when being transferred to children, and then from them to their children.
Use tax-free gifts: One of the best ways to reduce an estate tax bill is by using tax-free gifts. Federal law enables people to give up to $13,000 each year to as many recipients as possible. Any more that is given to a single person will be considered a taxable gift and applied to the gifter’s estate tax exemption.
Without taking advantage of these strategies, people could end up leaving loved ones with a large tax bill, so these are important to consider while estate planning.