Estate Tax Protection

Estate Tax Protection

Estate tax protection is an important consideration for many families. Large lifetime gifts can erode your exemption amount and trigger estate tax liability when you die.

Proper planning can minimize or eliminate these taxes. This article reviews some strategies that can help you avoid estate and inheritance taxes.

1. Transfer the Assets to a Trust

A trust helps keep assets out of probate and protects them from a beneficiary’s creditors. However, there are many different types of trusts, so it is important to figure out what type of trust you need and how to set it up.

To start, make a list of all your assets. Then categorize them into four different categories: real property (including a primary residence and vacation homes), financial instruments such as stocks and bonds, tangible personal property such as classic cars, artwork, and collectibles, and business interests.

Once you have classified your assets, you can begin transferring them to your Trust. For some accounts, like bank accounts and investments, simply changing the beneficiary on the account is enough. For other items, such as IRAs and life insurance policies, check the specifics of the business record to determine what is required to transfer the asset to a trust.

2. Donate to Charity

While donating to charity is good, many donors do not realize the tax benefits available. First, ensure the charity is a bona fide nonprofit organization. This can be done with an IRS search tool or contacting the group directly. You should also check a charity’s financial ratios, but don’t overdo it, says Cohen. For example, if one charity has a 30% overhead and another has 10%, don’t assume that the charity with the higher ratio is more effective with its funds.

Also, don’t give cash to questionable charities and never sign checks made payable to fundraisers. Instead, ask for literature on the charity and request audited financial statements from the nonprofit. Honest charities encourage your interest and should provide the information you request. Beware of dishonest telemarketers who mimic the names of reputable groups. Check with charity watchdog groups and your state charity registration office to see if the group is legitimate. Also, avoid using retirement account money to make charitable contributions as this is taxable as ordinary income when taken.

3. Transfer the Assets to a Family Member

There are a few different ways to transfer assets to family members. One option is to do so by executing a gift deed. This document allows you to pass property ownership to a beneficiary without paying any taxes. However, this strategy has a few ins and outs that you should discuss with your tax advisor.

Another option is to use joint tenancy. This is a common way to transfer real estate between spouses and family members. It can be a great way to avoid estate taxes and give your beneficiaries equal ownership of the property.

Finally, you can do a seller-financed sale, which is similar to a mortgage agreement. This allows you to give a family member a home with affordable monthly payments and modest terms. It can also reduce your estate’s taxable value and help you bypass the New York estate tax. It’s important to consider all of these options when designing your estate plan.

4. Create a Will

There are many online services that can help you create a will for a reasonable fee. However, if your estate is very large, it might make sense to work with an attorney.

A will allows you to distribute your assets according to your wishes. You can specify a percentage of your estate to each beneficiary, or you can leave specific items or sums of money (called bequests).

The will also names an executor who oversees the payment of debts and distribution of assets. The executor can be anyone you choose, such as your spouse, an adult child, a friend or a professional trust company.

You can also include a clause in your will that specifies a guardian for minor children. Having this in place can prevent the court from appointing a guardian and save your family time and expense.


By Christine Mayle