How to Reduce Inheritance Tax
Inheritance tax, also called the estate tax, is a type of tax levied by the government on assets greater than £275,000 in the UK and $3.5 million in the U.S. (2009 figures). Those may seem like relatively high numbers, but assets like homes can make up the bulk of this amount and leave heirs responsible for a hefty fee: 40 percent in the UK and 45 percent in the United States. For this reason, it's important to plan ahead and reduce the total tax burden of your heirs so that they can keep more of what you earned.
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Instructions
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Give your assets to your children now. This annual limit is currently £3,000 in the UK and $13,000 in the U.S. each year. Giving your assets to your children little by little in the form of cash gifts will prevent any taxes from being owed on those assets.
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Balance your assets with your spouse. Estate taxes are owed on an individual's assets, so your assets are treated differently than your spouse's. If you have significantly more than the inheritance tax limit in assets and your spouse has significantly less than the limit, consider transferring some assets into your spouse's name to balance the amounts.
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Set up an irrevocable life insurance trust with your kids as the beneficiaries. The trust will take on the proceeds of the policy, and won't be counted as part of your assets upon your death.
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Contribute to your children's education. In the United States, gifts to pay for educational expenses are not taxed as long as the money goes directly to the educational institution. Pay for your children's and their children's tuitions and you won't owe a dime on the gift amounts.
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Set up a QTIP trust (see the Resources section). If you have remaining assets after the inheritance tax limit, a QTIP trust will allow you to bequeath those assets to your spouse, but still name your children as the beneficiaries of those assets. When your spouse dies, the assets will be counted towards his or her inheritance tax limit, so this may not apply.
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Tips & Warnings
Taxes and tax laws change often, so the best investment you can make towards reducing your inheritance tax is to check with a tax professional before you implement any of the ideas presented. Not only will this individual tell you about recent developments in tax law, but she may be able to make additional suggestions to help you further reduce your tax bill.
