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Federal Estate Tax: Techniques to Reduce Tax on Estate and Assets
Federal Estate Tax: Techniques to Reduce Tax on Estate and Assets
Federal Estate Tax: Techniques to Reduce Tax on Estate and Assets
Estate Plan Lawyer » Resources » Federal Estate Tax: Techniques to Reduce Tax on Estate and Assets

What is federal estate taxation?

Federal Estate Tax is a tax upon the transfer of property at the time of death. This type of tax is based on the value of the property listed as an asset as part of the decedent’s estate. Property value is usually estimated at the date of death. This includes costs, losses, deductions, and exclusions. For 2022, the federal estate tax exemption is estimated at $12.06 million. There is a likelihood of an increase to the figure amount of $12.93 million. https://www.investopedia.com/estate-tax-exemption-2021-definition-5114715#toc-understanding-the-estate-tax-exemption.  In other words, when the value of the decedent’s estate is calculated, any amount exceeding $12.06 million will be subject to the federal estate tax. 

How estate planning techniques helps reduces tax liability

Having an Estate Plan can help reduce potential estate tax liability one may incur at the time of the decedent’s death. By utilizing estate planning techniques, there is a good chance of reducing the amount of property or minimizing the value of the property in the taxable estate. 

The following strategies can help minimize or reduce potential estate tax liabilities:

  1. Handing out portions of your wealth to your family members through gifts. This can downsize the estimated value of your estate if your estate tax is valued in excess of $12.06 million. For instance, if your estate is valued at $19.0 million, you can gradually pass your assets among your family members through gifts during your lifetime until the net value is less or equal to $12.06 million. https://smartasset.com/taxes/5-ways-the-rich-can-avoid-the-estate-tax.
  2. Setting up an irrevocable trust can go a long way to saving your family and loved ones from financial difficulties after your death. This is when the essentials of having life insurance come in to prevent such misfortunes from happening. Moreover, life insurance proceeds are not taxable. However, after death, it becomes part of your estate and may be subject to taxation. Id.

 In order to avoid having life insurance proceeds from being taxed, creating an irrevocable trust is a logical step to preventing this from occurring. Setting up the trust helps in transferring ownership of assets to another person, in most cases, a loved one. The only shortfall is that you wouldn’t be able to adjust it without the consent of the trust beneficiary. Thus, transferring the life insurance policy into the trust will save you from tax liability due to death benefits not being part of your estate. Id.

  1. Establishing a charitable trust is one way of bypassing estate tax. You can transfer part of your wealth to a charity of any kind you wish to donate. Any charitable donations you make during your lifetime can help reduce your total estate value. This is another way to reduce the estimated value of your net estate by the time you pass away. https://trustandwill.com/learn/estate-tax-planning-reduce-estate-tax.
  2. Family Limited Partnership is one other technique you can use to minimize or reduce estate tax. This is very beneficial if you happen to own a family-owned business or assets that you want to be owned by your family after you pass away. A family limited partnership allows family members to pool all their assets and distribute them to other members in the family. This act can reduce the net estate because the assets you invest in the family limited partnership and transfer to others are taken out of your estate. https://www.superlawyers.com/resources/estate-planning-and-probate/four-ways-to-reduce-and-avoid-estate-tax/

 

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