How to Take Advantage of Estate Tax Exemptions and Deductions
Introduction
Estate taxes can be a daunting task for anyone to tackle. They can be complex, confusing, and expensive. However, there are ways to take advantage of estate tax exemptions and deductions. In this article, we will discuss the tips and tricks to minimize the impact of estate taxes and ensure you keep the most of your hard-earned assets.
Estate Tax Exemption
The estate tax exemption is the amount of assets that are exempt from federal estate tax. This amount is $11.7 million for individuals in 2021. This means that if your estate is valued at less than $11.7 million, your heirs won't have to pay any federal estate taxes. However, if your estate is worth more than $11.7 million, your heirs will have to pay estate taxes on the amount over this exemption.
Marital Deduction and Portability
If you are married, you can take advantage of the marital deduction. The marital deduction allows you to leave an unlimited amount of assets to your spouse, free of federal estate tax. However, when your spouse passes away, your estate will still be subject to estate taxes.
Portability is a term used to describe the ability to transfer any unused estate tax exemption from a deceased spouse to their surviving spouse. This means that if your spouse passes away and doesn't use their full estate tax exemption, you can add it to your own exemption, effectively doubling your exemption to $23.4 million in 2021.
Irrevocable Life Insurance Trust (ILIT)
An Irrevocable Life Insurance Trust (ILIT) is a trust that owns a life insurance policy. The policy can be used to pay estate taxes upon your death, allowing your heirs to inherit your assets free of estate taxes.
When you create an ILIT, you transfer ownership of your life insurance policy to the trust. This removes the policy from your estate and lowers the value of your estate, reducing the amount of estate taxes owed. Additionally, the proceeds from the policy can be used to pay estate taxes upon your death, ensuring your heirs won't be burdened with paying these taxes.
Annual Gift Exclusion
The annual gift exclusion allows you to give up to $15,000 per year (in 2021) to any individual free of federal gift tax. This means that if you have multiple children or grandchildren, you can gift them up to $15,000 per year each without incurring any gift tax.
By gifting assets before your death, you are able to lower the value of your estate and reduce the amount of estate taxes owed. Additionally, you may be able to take advantage of the generation-skipping transfer (GST) tax exemption, which allows you to transfer assets to your grandchildren or great-grandchildren without incurring gift or estate tax.
Charitable Donation
Charitable donations are a great way to reduce the value of your estate and lower the amount of estate taxes owed. When you make a charitable donation, you are able to deduct the value of your donation from your gross estate, lowering the amount of estate taxes your heirs will owe.
Additionally, you may be able to take advantage of a charitable lead trust (CLT) or a charitable remainder trust (CRT). These trusts allow you to donate assets to a charity, while still retaining some of the income generated by these assets. This allows you to lower the value of your estate, while still receiving income from your assets.
Conclusion
In conclusion, estate taxes can be a significant burden on your heirs. However, by taking advantage of estate tax exemptions and deductions, you can minimize the impact of these taxes and ensure your heirs keep the most of your assets. The estate tax exemption, marital deduction, ILIT, annual gift exclusion, and charitable donations are all great tools to use in your estate planning. Be sure to consult with a tax professional to ensure you are taking advantage of all the tax-saving strategies available to you.