How to Avoid Real Estate Inheritance Tax
Inheritance taxes, also sometimes called death taxes, are state taxes on money and property received by inheritance. The person who receives an inheritance, such as the son or daughter of a deceased parent, is responsible for paying the inheritance tax. Since the most valuable property most of us own is our homes and real estate, it is important to plan ahead to limit the inheritance tax imposed on real estate that transfers to our heirs when we die.
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Instructions
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Give your real estate away to your children before you die. The inheritance tax only applies to real estate that transfers by inheritance, meaning after your death.
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Plan ahead to avoid getting charged a federal "gift tax." To avoid the gift tax, give each child or loved one less than the $1 million limit's worth of real estate.
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Put the real estate into a family trust that names you as the primary beneficiary and your family or loved ones as the contingent beneficiaries when you die. This is a viable alternative if you don't want to give the property away while you are still alive.
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Donate your real estate to a charitable organization. All gifts to charitable organizations are free from real estate inheritance taxes.
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Take out a mortgage to reduce the equity, or total value, of your real estate before you die. The value of real estate that is subject to inheritance tax is equal to the equity you have in the real estate. If you take out a mortgage and reduce your equity, you will reduce the potential inheritance taxes.
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Tips & Warnings
If you have a significant amount of real estate, it would be well worth your time and money to consult an estate planning attorney and accountant to develop a strategy to avoid taxes. A few thousand dollars spent on a good attorney can result in much larger tax savings for your heirs.
State inheritance taxes vary from state to state, and many states don't have an inheritance tax, so check your state's laws to work out your particular details. You also need to consider the federal estate tax, which is different from the inheritance tax. Finally, you need to account for lifetime gifts by working around the federal gift tax. Again, if you have a large real estate investment, it is wise to seek professional help.
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