Leaving behind a legacy is important; when transferring assets after your death, estate tax liability on your assets can be quite burdensome on your heirs. Let’s take a look at four ways you can minimize estate taxes on size-able estates while maximizing your legacy to your heirs.
1. Lifetime gifts to family. Under the law, you have the right to gift up to $12,000 per year per person without incurring a gift tax. The gift tax exclusion can also be utilized by your spouse. Therefore, you and your spouse (combined) can gift up to $24,000.00 per year to an individual without incurring a gift tax. So, you could significantly reduce your estate value (and your estate tax liability) over the course of years before you die. Planning is essential, so consider speaking with an attorney who is well versed in Estate Planning and Administration to maximize your gifts to each family in equal proportions.
2. Defer taxes via spousal gifts. You can also reduce your estate tax liability by gifting to your spouse during your lifetime. While this will reduce estate taxes upon your death, your spouse’s estate (including your gifts) would not be taxed until his/her death.
3. Create a family limited partnership. If you have a family business you want to pass on to your heirs, create a family limited partnership to avoid estate taxes on the business. Creating this limited partnership will also allow your heirs to have their partnership income taxed at a rate lower than estate taxes.
4. Donate to charity. By making lifetime charitable gifts to foundations and non-profit organizations, you can reduce your income tax liability and avoid more significant estate taxes. Work with an estate planning attorney to figure out how you can best donate to charities and reduce estate taxes while leaving behind a substantial inheritance to your family.
Remember, working through your estate planning now will make it easier for your family to make a smooth financial transition after you’re gone.