When a person dies, their estate does not automatically pass to their heirs. The decedent’s property often enters probate court, where an estate administrator works with the law to settle debts, distribute inheritances and pay estate taxes.
Commonly referred to as “death taxes,” estate taxes can take a sizable amount from a person’s property, diminishing inheritances and potentially placing cherished family property at risk. Thankfully, U.S. citizens can employ a few estate planning tactics to preserve valuable portions of their estate and protect the family legacy.
Primary methods of reducing estate tax
Not all of these methods will work for every individual. Each family is very different, so consult with a lawyer experienced with estate planning on the most beneficial ways to minimize estate taxes.
A lawyer may recommend the following strategies:
- Transfer of marital property: Spouses can transfer property between each other, tax-free. Property transferred in this way removes its value from the estate, lowering death taxes. The person’s spouse will add the property’s value to their estate, so this method only defers the tax until the spouse’s death.
- Gifting: Individuals can gift up to $12,000 once a year to any number of individuals. These gifts reduce the value of one’s estate while keeping that money within the family.
- Trusts: A lawyer familiar with estate planning can recommend different trusts to preserve capital, assets or property for one’s heirs. Different types of trusts can serve different goals.
- Private annuity: This method allows a person to “sell” an asset to their heirs in exchange for an unsecured promise to pay annual payments on the asset every year of the seller’s life.
- Charitable donations: Individuals may also reduce the value of their estate by gifting portions to charity. Donations to charity are also tax-deductible, and many allow the donor to use the gift until it passes to the charity upon death.
- “Special use” valuation: When the federal government taxes property, they usually value the property at its “highest and best use” value. This method can over-value a family home, gouging an estate upon death. The Internal Revenue Code adjusts these rules to value certain property for its “actual use” value.
A lawyer can draft a comprehensive estate plan
Individuals with questions about preserving their estate can reach out to a local attorney familiar with estate planning. A lawyer can help evaluate a family estate, suggest tax-saving strategies and draft a comprehensive estate plan.