Estate taxes are imposed on your estate before its contents are distributed to your beneficiaries. For the tax year 2018, you can leave $5.6 million to your loved ones before you have to pay federal estate or gift tax. If you live in New York state and have an estate worth $5.25 million or more, a state-level tax of 3.06% to 16% will apply.
These taxes can diminish the value of your estate and leave your beneficiaries with less than you intended. Fortunately, there are ways to minimize and even eliminate the amount of estate tax you would ordinarily have to pay.
- Leave the money to your spouse
If you are married, you can leave an unlimited amount of money to your spouse without incurring an estate tax as long as he or she is a U.S. citizen. Each of you has an exemption of $5.6 million, and any unused part of this exemption passes on to the surviving spouse.
- Make tax-free gifts
You can realize significant estate tax savings if you gift assets while you are still alive. The gift tax exclusion for 2018 lets you give away up to $15,000 per recipient without incurring taxes. Cash gifts for someone else’s tuition or medical expenses are also exempt, as are donations to political organizations and qualifying charities.
- Create an Irrevocable Life Insurance Trust (ILIT)
When you make an irrevocable life insurance trust (ILIT) the owner of your insurance policies, you can remove their value from your estate. Death benefits will not be included in the estate as long as you live for three years after transferring a policy. If the ILIT is also the policy beneficiary, you can keep the proceeds safely in the trust and periodically distribute money to your heirs. ILITs are a recommended way to leave money to family members who might otherwise spend a large inheritance irresponsibly.
4. Establish a Qualified Personal Residence Trust (QPRT)
A qualified personal residence trust (QPRT) removes your home from your estate for 10-15 years while allowing you to live there. When the term is up, the home transfers to the beneficiaries of the trust. If you want to continue living in the property, you can arrange to pay rent to these beneficiaries.
When you transfer your home into a QPRT, it is treated as a gift and subject to gift tax, but the value is not actually the full market value of the property, as it would be if you simply gave it to them. It can be discounted to reflect your retained interest in the home. If you outlive the term, the home’s value and any appreciation avoid estate tax.
- Create a Grantor Retained Annuity Trust (GRAT) and Grantor Retained Unitrust (GRUT)
These trusts permit you to transfer an asset that produces income, such as a business or stock portfolio into the trust for a specific term. GRATs are for fixed-income assets while GRUTs are designed for those with fluctuating income. When the term ends, the property or properties go to the trust beneficiaries and have a reduced value in terms of gift tax.
Preserving your estate for the next generation calls for a proper valuation of your assets and a strategy that offers maximum protection for them. The estate planning team at Rosen Law LLC will recommend ways for you to minimize taxes and leave your estate as intact as possible for your loved ones. To speak with an experienced estate planning attorney, please call (516) 437-3400.