Estate planning can be very challenging, especially when creating a quality estate plan. There are several things you have to make provisions for like your minors, your spouse, possibility of incapacitation, etc.
Also, when planning your estate, it is crucial that you have the death tax in mind. If you end up planning your estate without considering this tax, you may end up putting the beneficiaries of your estate in a tight spot. They’ll end up splashing lots of cash on death tax (depending on the worth of your estate).
Without much ado, lets refresh our memory on what estate planning is before we consider what a death tax is and how to reduce it with estate planning.
Estate Planning Explained.
Estate planning is not one of those fun plans you make, like planning for a trip to the Grand Canyon in Arizona, a trip to China, or Hawaii. Estate planning involves lots of processes, decisions, paperwork, etc.
You see, estate planning may not be fun, but failure to do can make life difficult for you and those your care about.
What is this plan about?
Estate planning is a plan made in preparation of one’s death. This plan comprises of the preparation of a will among other important estate planning documents like trust, power of attorney, etc. An estate plan also covers the management, administration, and distribution of and estate which is activated after the estate owner’s death.
Now that we have a little insight into what estate planning is, let’s take a look at the definition of a death tax.
What is Death Tax?
Death tax goes by a few names. It is either called an estate tax, inheritance tax or death duties. This tax is very common among beneficiaries of an estate.
A death tax is basically a state tax paid by individuals who receive money or properties from the estate of a decedent. Now, it is important you don’t view an inheritance task as the normal federal tax. Inheritance taxes differ from the normal federal tax you know.
How Does Death Tax Work?
Death tax is quite different from the typical federal tax we all know. As soon as the estate executor has completed all the required evaluation and distributions, the death tax will be considered. And like I stated earlier, death tax is not charged on the estate of the deceased as a whole; rather it is levied on the money or properties each beneficiary get.
So after each beneficiary must have received his or her portion of the deceased estate, the inheritance tax is calculated and each beneficiary must ensure that the tax is remitted.
How To Reduce Death Taxes With Estate Planning?
Estate planning is the best way to reduce or avoid outrageous death taxes. In the event that you fail to plan your estate, the beneficiaries of your estate may end up paying huge death taxes, thus reducing the value of the assets or money allocated to each beneficiary.
Here are a few ways on how to reduce death taxes with estate planning.
1. Spend your assets
Yes, you heard that right. Spending your assets is one of the best ways to lessen the value of your estate and cut down estate tax liability. However, this method is appropriate for those who have enough money. Don’t go about spending your assets when you have little money; you will end up being broke.
2. Create a Trust
A trust is a very important component of estate planning. With a trust you can escape probate and avoid paying huge estate taxes. Assets placed in a trust will not be included as part of your estate, thus, no inheritance tax will be paid on them. Contact an estate planning lawyer to learn more.
Not all states impose death tax on a deceased estate. So those who are concerned with the payment of death taxes should relocate to states that don’t impose death tax. Some of these states are:
4. Give away your assets as gift
Here is another way to reduce death tax. However, this method is for those who are comfortable with giving away some of their assets while alive.
Gift given when an individual is alive reduces the $11.58 million estate tax exemption. This simply denotes that the tax-free limit placed on your estate assets will reduce when you kick the bucket. But there is a little warning. As of the year 2020, you can present gifts worth $15,000 or less without lessening the estate exception. Thus, presenting gifts worth $15,000 or less each year is the best way to cut down the value of your estate without lessening your estate exemption.