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Using Trusts to Minimize the Impact of the Estate Tax

On Behalf of | Jan 24, 2017 | Estate Planning

The estate tax law states that every dollar over the $1 million mark on the valuation of an estate is taxed at 55 percent. This is the federal rate and states might even add their own death tax on top of it.

Anyone concerned with their ability to pass down their estate to their beneficiaries without giving a significant portion of that estate to the government may benefit from learning some basics about the estate tax. After gaining an understanding of the basics, you will place yourself in a better position to speak with an attorney about the specifics of your situation.

Give it Away Before Death

This is the easiest way to cut down the estate tax. The gift tax law states that people can give away up to $13,000 per year to any one person. Any dollar amount over this is taxed at a high rate; however, people can give away $13,000 per year to multiple people. This will cut down the estate before death; however, this won’t put much of a dent in an estate on the order of millions of dollars. That’s where trusts are important.

The Irrevocable Life Insurance Trust (ILIT)

Many people might have overlooked the fact that life insurance benefits are included in the estate tax. Since many people’s life insurance policies are millions of dollars, this is a serious problem. By opening up an ILIT, the ILIT is the owner of the life insurance policy. If people live for at least three years after the policy has transferred hands to the ILIT, it is no longer included in the estate valuation. The ILIT will also be the beneficiary of the policy; however, it will be disbursed to the spouse, children, and grandchildren according to the arrangement when the trust is set up. The value is also protected against creditors looking for money.

The Qualified Personal Residence Trust (QPRT)

In this arrangement, the value of the home is removed from the estate valuation. Since many people’s most valuable asset is their home, this is a key advantage. The trust is specified for a period of time, usually on the order of 10 to 15 years. After the term expires, the home leaves the trust and is transferred to the beneficiaries. If the owner of the house dies before the trust term expires, the home is still included in the valuation of the estate tax; however, if the trust term expires and transfers hands before the owner dies, its valuation is significantly reduced and could save someone hundreds of thousands of dollars on the estate or gift tax.

These are only a couple of the trusts available to protect the value of an estate. The estate tax can seriously detract from people’s inheritance and key planning is needed to minimize its harm. For more information on trusts, contact an experienced estate planning attorney for assistance.

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