How to Minimize Inheritance Tax

Inheritance tax, also known as estate tax or death tax in the United States, is imposed on either an estate or beneficiaries of an estate when a person dies. Every year the maximum amount that can be transferred at death without paying taxes (referred to as the estate tax exclusion) changes. In estate planning, your attorney works with your estate to figure out how to get the amount you transfer as close as possible to this number. Certain estate planning tools will help to minimize inheritance tax, but making several decisions while you are alive can also help to reduce your tax liability.

Instructions

1. Make gifts to your beneficiaries while you are alive. Up to $13,000 (as of 2009) can be given to any single individual in any given year without imposing any tax liabilities on you or your beneficiary. If you are married, the amount increases to $26,000, as your gifts are considered to be joint gifts.

2. Create a Family Limited Partnership (FLP). These partnerships operate much like normal business partnerships in that any assets transferred to the FLP become the property of the partnership rather than your property individually. You can designate in the formation documents of the FLP that the assets will be in your sole custody during your life, and then default to the control of your beneficiaries after your death. Once you die, your beneficiaries can transfer the assets to themselves from the FLP without invoking estate tax liability.

3. Create an AB Trust. With wills or intestacy (dying without a will or trust), the majority of your property will pass to your spouse. While transfers to spouses are tax free, there will be an increased tax liability when your spouse dies and the assets transfer to your children or other beneficiaries. An AB Trust will allow your spouse use of the property after you die, but still direct the disposition of the assets at her death. This uses both your and your spouse's estate tax maximum exclusions, rather than just one of yours.

4. Sell property to beneficiaries with a private annuity. An annuity allows you to transfer a large asset, such as a house, to a beneficiary in exchange for an unsecured promise to make payments for the duration of your life. The large piece of property will be removed from your total assets immediately and will trigger no tax liability. Any remaining payment after you die is considered forgiven, and your beneficiary will own the asset free and clear.

5. Make charitable gifts during your life. There is no limit to the amount of money you can donate yearly, so your total assets can be reduced below the estate tax exclusion amount, meaning your beneficiaries will pay little or no inheritance tax.

Tips & Warnings

• Gifts do not have to be cash; you can also give away interest in property. For instance, if your home is worth $1.3 million dollars, you can give a 1 percent interest in your home to each of your children each year without having any tax liability. The percentage of the home that remains at your death will then pass through normal means.

References

• Estate Plan Center: Lower Estate Taxes
• FindLaw: 10 Ways to Reduce Estate Taxes
• Free Law Advice: How Can My Estate Plan Lower the Federal Transfer Tax Liability?