How to minimize inheritance tax during the probate process

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How to minimize inheritance tax during the probate process

Not all estates are taxable. But during estate planning, you should always consider if your estate will be subject to any form of tax when you pass away. Such taxes can eat a considerable part of your estate, leaving your loved ones with less than what you had wanted.

Even when your estate will not be subject to federal or state estate tax, your beneficiaries may have to pay inheritance tax during the probate process before they can inherit your estate. But what exactly is inheritance tax?

Inheritance tax defined

Inheritance tax in the United States is an amount of money charged for the transfer of a deceased person’s assets. Only those assets transferred via a will or state’s intestacy laws may incur inheritance tax. And not all states impose inheritance tax on asset transfer.

How to minimize inheritance tax

There are many ways to minimize inheritance tax during probate or even completely avoid it. To do this, you should first be aware that only those assets that are going through your will will be charged an inheritance tax. In the absence of a will, then all assets you own in your name alone will be transferred according to your state’s intestacy laws and inheritance tax will still be paid. All of these happen during probate.

To minimize or avoid inheritance tax, it therefore means you must reduce the value of assets passing through probate. By so doing, the total value of inheritance tax to ve paid will be reduced.

1. Annual gifting

Gifting is the act of voluntarily transferring ownership of your asset to another individual without full valuable consideration.

As you get older, you may have valuable funds that you hope to transfer when you pass away. But you can start doing so now that you’re alive. You are allowed to gift up to $15,000 annually without any tax return. It doesn’t always have to be cash. It can be stocks, bonds, cars, or any asset so long there is monetary value to it. When you do this yearly, the value of assets to be transferred will be less, hence minimizing inheritance tax.

2. Holding assets in a living trust

Assets passed via a trust do not go through probate, and hence escape all tax including inheritance tax.

A trust is a legal entity that holds assets, managed by a trustee on behalf of the beneficiary. When you create a living trust, the trust becomes the owner of the assets you fund into them. But you can name yourself as the trustee so that you can use the assets to your benefit until you pass away, at what time your appointed successor trustee passes the assets to your named beneficiary tax-free.

3. Holding assets in an irrevocable trust

In an irrevocable trust, you have no access to the assets you funded into it. The assets you place in this kind of trust should be those you don’t expect to use until death, because the trust becomes the permanent owner until you pass away, after which the assets go to your beneficiaries completely tax-free.

Since trusts are highly complex legal documents, you should get an estate planning attorney to create your trust for you.

4. Spending

There is no reason waiting for death to come when you can spend and enjoy quality life with your loved ones. You can spend on them, fund their accounts, and get their appreciation while you’re yet alive.

States that charge inheritance tax in the United States

As at 2021, only six states in the US charge inheritance tax.

These states include:

  • Iowa (up to 15%)
  • Kentucky (up to 16%)
  • Maryland (up to 10% of the asset transferred)
  • Nebraska (up to 18%)
  • New Jersey (up to 16%)
  • Pennsylvania (up to 15%)

If you own estate in any of these states, then you should consider how to minimize inheritance tax when writing your will.

Differentiating inheritance tax from estate tax

Inheritance tax is very different from estate tax. While there is a threshold amount at which an estate becomes subject to estate tax, there is no threshold for inheritance tax.

If an estate values above a certain amount, the estate tax will be a percentage of the estate’s value. Your estate must be subject to federal estate tax if it surpasses $11.7 million. As for state estate tax, the threshold varies from state to state, and not all states impose estate tax.

On the other hand inheritance tax is imposed on the value of estate each beneficiary receives.

For legal assistance, talk to an estate planning lawyer near you.

DISCLAIMER: The information provided in this blog is for informational purposes only and should not be considered legal advice. The content of this blog may not reflect the most current legal developments. No attorney-client relationship is formed by reading this blog or contacting Morgan Legal Group.

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