In 2013, Congress made certain estate tax provisions permanent, such as the exemption from estate tax for the first $5.45 million of one’s estate, indexed annually for inflation. There has been no such clarity on the state levels, which remain a patchwork of different estate tax laws. So, depending on the value of your estate, and your residence, your estate may owe considerable state estate tax even if it is exempt from federal estate tax.
There are various strategies that estate planning lawyers use to lower clients' taxable estate on both federal and state levels. Some of the strategies proven to reduce estate taxes are:
GRAT – If you contribute assets into a Grantor Retained Annuity Trust, you could receive a regular payment akin to an annuity over many years, and then when the trust term ends, the appreciated assets pass to your heirs, are not considered part of your estate, and will not be subject to estate taxes.
QPRT – If you contribute your personal residence into a Qualified Personal Residence Trust, you may still live in the residence for a term of years, and when the trust term ends, the home is removed from your estate while passing to your heirs and will not be subject to estate taxes.
FLP – After contributing your assets into a Family Limited Partnership in return for general and limited partnership interests, you may then, over time, gift your limited partnership interests to your heirs while retaining the general partnership interest (thereby continuing to control the FLP), and thus remove the value of the limited partnership interests from your estate. FLPs also provide the additional bonus of excellent asset protection.
CRUT – By contributing appreciated assets to a Charitable Remainder Unitrust, you are entitled to a charitable deduction in the current tax year, regular payments from the trust back to you during the trust term, and at the end of the term the assets pass to the charity, are not subject to income tax and are removed from your estate.
ILIT - If you own or control a life insurance policy, the IRS deems its death benefit to be in your estate and subject to estate tax, even though you will never receive the death benefit during your life. If you contribute this life insurance policy to an Irrevocable Life Insurance Trust, you may remove the insurance policy from your estate. Your family members may receive the death benefit from the trust, free of any estate tax.
Dynasty Trust – Such a trust allows the preservation of assets for your descendants, along with offering asset protection from creditors, as well as delay of the estate tax for many generations. The trust can distribute income to beneficiaries, but principal is preserved, asset-protected and grows tax-free.
These strategies are not only for the super wealthy. We have successfully utilized these strategies for clients who are concerned with leaving as much of their hard-earned money for their family with as little as possible going to the IRS and state tax authorities. These are equally attainable goals with a $5 million estate as they are at $50 million. Moreover, these strategies are affordable, especially considering the amount of tax savings they offer.
Of course, if you want to move to Florida or Nevada (where they have no state estate tax), go for it. But if you’re considering a move for estate tax reasons, first consider these various strategies to lower your estate tax liability without having to relocate. Give us a call at 253.858.5434 if you, your family, friends, neighbors, or co-workers have questions about strategies for saving on estate taxes.