When you put together an estate plan, odds are, one of your goals is to leave as much of your legacy behind for your family and loved ones as you possibly can. Regrettably, however, estate taxes, or the taxes assessed against an heir’s inherited amount from an estate, can eat up a substantial portion of what you wish to leave behind.
There are several steps you can take during estate planning that can help reduce how much your loved ones must pay in estate taxes. Thus, if minimizing estate taxes is one of your estate planning goals, here are some things to consider.
1. Entering assets into trusts
Placing your assets into a trust is one method many people rely on to reduce estate tax. Once you enter your assets into a trust, they become the official property of the trustee, and while this gives someone else power over your money, it also allows you to avoid having taxes assessed against the assets you include therein, thereby lowering your estate taxes.
2. Giving away some of your wealth now
Another action many people take to reduce how much their heirs lose to estate taxes is to start giving away some of their assets before their passing. If you have trusted adult children who may need your money now more than they might in 10 or 20 years, you can maximize the amount you can give them over time by simply making distributions to them now, before you pass.
3. Purchasing more life insurance to make up the difference
A third option that is particularly popular among those with a high net worth is to simply purchase extra life insurance to help cover the cost of estate taxes. The trick to doing this properly, however, involves creating what is known as an irrevocable life insurance trust and purchasing the policy through it. By doing so through a trust, you can use the policy to help cover estate taxes, rather than have it add to them.
While you may not be able to avoid estate taxes entirely, the three methods outlined above may help you leave considerably more of your wealth behind for your loved ones.