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Strategies To Reduce Estate Taxes

When a person dies, the tax department considers their property sold at fair market value, resulting in a capital gain. That’s why effective estate planning is necessary. This article discusses strategies that can reduce your estate taxes.

Buy Life Insurance

The fundamental principle behind this strategy is that insurance premiums paid are typically not taxable income. By diverting a portion of your income into insurance premiums, you effectively reduce the taxable income on which you would have paid taxes otherwise.

Furthermore, certain insurance products—such as permanent life insurance policies—offer additional tax advantages. The cash value that accumulates within these policies can increase on a tax-deferred basis. As a consequence, you won’t be subject to immediate taxes on the earnings. This can be particularly advantageous if you use the policy as an investment tool, as it allows your money to grow faster over time.

Additionally, insurance can be a valuable estate planning tool by providing a tax-free payout to your beneficiaries upon passing. This payout can help your loved one cover expenses and potentially avoid estate taxes that might have applied to other assets.

Give Gifts to Family

Gifts made during your lifetime are not included in your estate when calculating estate taxes upon your death. By gradually gifting assets or money to your family members, you can reduce the overall taxable value of your estate, potentially bringing it below the taxable threshold.

Be aware of the annual gift tax exclusion limit set by the government. By adhering to this limit and taking advantage of any available gift tax exemptions, you can minimize the tax burden on your estate and your beneficiaries.

Set Up a Trust

By establishing a trust, you can transfer ownership of your assets to a different legal entity, usually controlled by a trustee. This legal entity becomes the owner of the assets, which means that any income generated from those assets is no longer considered part of the individual’s taxable income.

The key advantage of this approach lies in the fact that trusts are often subject to different tax regulations compared to individual income. The income generated within the trust can be taxed at a lower rate or may even be exempt from certain taxes, depending on the type of trust and its location.

Another significant benefit of a trust is the ability to distribute income among multiple beneficiaries. This allows for more strategic income distribution, potentially bringing beneficiaries into lower tax brackets and reducing the overall tax burden.

Transfer to Spouse

When a person transfers assets to their spouse, they maintain the ability to draw upon the income generated by those assets. Utilizing the spouse’s protected status under law diminishes the overall tax burden, thereby leading to substantial tax savings.

The estate’s value can be reduced through strategic transfers, enabling the surviving spouse to utilize the applicable estate tax exemption to its fullest extent. Consequently, the couple can shield a significant portion of their wealth from estate taxes, ultimately preserving more assets for their beneficiaries.

Family Limited Partnership

Family Limited Partnership (FLP) structure involves the formation of a partnership in which the founding family members assume the roles of general and limited partners. The general partners control the management and decisions concerning the partnership’s assets, while limited partners maintain a more passive role with limited control. The taxable income generated by the partnership’s assets is distributed among all partners through this arrangement.

The limited partners’ share of income can be distributed among family members in lower tax brackets, potentially leading to a decreased overall tax liability for the family unit. Moreover, FLPs offer creditor protection for family wealth by placing assets within the partnership and limiting the creditors’ access only to the limited partners’ interests.

Crews Law Offices provides dedicated assistance in estate planning, wills, trusts, and power of attorney. We can also help navigate the probate process if required. Contact us for more information.

A recent case in which I have become involved illustrates why everyone should have a will.  A husband and wife had been married for about 25 years.  They had no children together, but wife had a daughter from a previous marriage.  Wife also owned real estate she inherited from her mother.  Wife wanted the real estate to go to her daughter.  Wife wrote a handwritten will, known as a holographic will, giving all her property to her daughter.  Unfortunately, holographic wills are not valid in South Carolina.  Therefore, wife died leaving no valid will (that’s called “intestate”).  Under South Carolina intestacy law, wife’s property went one-half to husband and one-half to daughter.  Already, daughter has received only one-half of the inheritance that wife intended for her.  Now, the husband has died.  He also had no will.  Because the daughter was a step-daughter, she gets nothing from husband’s estate.  Husband’s heirs under the law are his brother and sister, with whom he has not spoken in 20 years.  Now, husband’s brother and sister will own one-half of the property the wife inherited from her mother.  By the way, the property is valued at approximately $500,000.  The message here:  “GET A WILL NOW”