Disclaimer: I am not a CPA or a tax professional or a lawyer. Please consult a professional for legal or tax advice. The views expressed here are purely for informational purposes.
Coming from India, the concept of estate tax is foreign (literally). Really, one has to pay tax to pass on one’s assets to heirs in USA. You have worked hard, paid taxes, accumulated wealth and now when you die, Uncle Sam can claw 40% of your estate with ESTATE TAX, wait it even gets better, six states also levy inheritance tax on top of Federal Estate tax.
Given that the exemption limits are high, $12.92 million for singles and $25.84 million for couples for 2023, most folks do not have to worry about it. Fortunately, I know the readers of this blog are blessed to have the opportunity to cross the above wealth numbers.
There are many ways to mitigate the estate tax or avoid them, few are discussed below:
1. Irrevocable life insurance trust.
Life insurance is one of the cornerstones of estate planning. Life insurance can become part of your estate and be taxable. The way around this is to create irrevocable life insurance trust.
2. Give gifts to family.
One can give gifts to family throughout one’s life and reduce the estate at the time of death below the taxable limit. For 2023, one can give $17,000 tax free for singles or $34,000 for joint filers, with a lifetime exemption limitation.
3. Make charitable donations.
One can pass part of wealth to charity through a trust. There are two kinds of charitable trusts, charitable lead trusts and charitable remainder trusts.
With charitable lead trust, some of your assets can pass to a charity, reducing the estate size that is passed on to heirs, with planning this can result in elimination of taxes.
With charitable remainder trusts, one can transfer assets to irrevocable trust, enjoy the income benefits from these assets during lifetime After death, these assets will pass to the charity.
4. Qualified Personal Residence Trust
One can transfer the personal residence to a trust and live in the property for a predetermined period. If one survives the term of the trust then the property is excluded from estate tax. One can freeze the value of the asset, avoid paying gift tax and reduce the size of the estate. This can also be set up for rental property.
5. Family limited partnership
One can create a family limited partnership, if one owns a business or real estate. Set up a family limited partnership with you as the general partner and the family members as limited partners. You still run the company as a general partner, and the family members own a portion as limited partners, consequently the size of your estate will be smaller.