How to Reduce Federal Estate Taxes
There are four main ways to reduce federal estate taxes when someone dies. Some of these methods require estate planning prior to death. An estate-planning attorney can help you take the steps to set up a financial plan to reduce federal estate taxes for your beneficiaries. You can use gift giving, powers of appointment, trusts and life insurance to reduce federal estate taxes.
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Instructions
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Utilize gift giving to pass money to heirs during your lifetime. The federal government allows a certain amount of money to be given from one individual to another each year, without being taxed. This amount is declared by the IRS and changes yearly with inflation rates.
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2
Use your will or a trust to create a power of appointment. A power of appointment allows you to designate one person (usually a spouse or child) to decide who will benefit from the trust later. This means you can designate your child to decide if she will use the trust money or issue it to her children.
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Set up a limited (also called a "special") power of appointment. This power of appointment still designates one person to decide who will benefit from the trust; however, there are a limited number of people, whom you have chosen, that this person may give the benefits to.
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Institute a QTIP trust to control additional assets even after you die. In this arrangement, additional money earned after death (such as that gained from investments or appreciation of assets) will automatically enter this trust. The beneficiary, usually the living spouse, will have to follow a strict set of instructions as to how to spend this money and can avoid paying estate taxes while doing so.
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Set up a bypass trust, passing your estate to a trust instead of your surviving spouse. This gives your surviving spouse lifelong use of your estate without being taxed on it. This is especially important for elderly spouses, whose inevitable subsequent passing would cause the money to be retaxed once it is passed on to heirs.
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Implement a life insurance policy to pay your beneficiary upon your death. In this arrangement, you pay a premium each year until your death. At this time, the insurance company would pay a predetermined "face value" amount to your beneficiary.
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Tips & Warnings
To avoid federal estate taxes, each spouse may give one person the maximum allotted gift in each year. This means a husband and wife can give a total of $24,000 to one person in a year if the annual maximum allotment is $12,000.
Without setting up a trust, your estate becomes part of your spouse's estate when you pass away. A trust allows you to designate a specific party or parties who will benefit from your estate. This is often used when spouses have children from prior marriages, to make sure the first passing spouse's children are not bypassed.
