In simple terms, there are three (3) ways to reduce taxes:
1. Use Both Exemptions
If your spouse is a U.S. citizen, you can leave him or her an unlimited amount when you die with no estate tax. You may encounter a problem though. Let's say, for example, that Tim and Sarah together have a net estate of $4 million and they both die in 2008. Tim dies first. He leaves everything to Sarah, so no estate taxes are due then. When Sarah dies, her estate of $4 million uses her $2 million exemption. The tax bill on the remaining $2 million is $900,000!
But if, instead, Tim and Sarah plan ahead, they can use both their exemptions and pay no estate taxes. A tax-planning provision in their living trust splits their $4 million estate into two trusts of $2 million each. When Tim dies, his trust uses his $2 million exemption. When Sarah dies, her trust uses her $2 million exemption. This reduces their taxable estate to $0, so the full $4 million can go to their loved ones. This planning can also be done in a will, but you would not avoid probate or enjoy the other benefits of a living trust.
2. Remove Assets from Your Estate
A great way to reduce estate taxes is to reduce the size of your estate before you die. You probably know whom you want to have your assets after you die. If you can afford it, why not give them some assets now and save estate taxes? It can be very satisfying to see the results of your gifts; something you can't do if you keep everything until you die.
Appreciating assets are usually best to give, because the asset and future appreciation will be out of your estate.
Assets you give away keep your cost basis (what you paid), so the recipients may have to pay capital gains tax when they sell. But the top capital gains rate is only 15% (assets held at least 12 months). That's a lot less than estate taxes (45%) if you keep the assets until you die.
3. Buy Life Insurance
See page on life insurance trusts. This can be an inexpensive way to pay estate taxes and the death benefits are not included in your estate
Contact us today to schedule a free initial consultation to discuss your estate planning options.