Most of us will never have to worry about estate tax. But if you expect to die with more than $5.49 million in assets, your family could pay out as much as 40 percent of the value of any assets over that amount in federal taxes.
To cut the tax bite, many wealthy people have a strategy of sharing the wealth while they are still alive, using tax-free ways to distribute money to their heirs — or their favorite charities.
“The thing that people underestimate is how much they’re really worth,” says David Geibel, managing director and senior vice president at Girard Partners in Pennsylvania. “It’s not what you’re worth today, but it’s also what you could be worth 10 or 20 years from now.”
Like any estate planning, strategizing to minimize the your tax bill should start early. “Often we get called in, and Mr. and Mrs. Smith are 82,” Geibel says. “If you’re pretty wealthy, the sooner you can start, the better.”
[Read: What to Do If Someone Files a Fraudulent Tax Return in Your Name.]
Federal estate tax actually is paid by only a small number of Americans. If you die with less than $5.49 million in assets in 2017, you pay no estate tax. Bigger estates are exempt from tax on the first $5.49 million, a number that is effectively doubled for couples. The threshold amount rises every year with inflation.
The Tax Policy Center, run by the Urban Institute and the Brooks Institution, estimates that only 5,190 estates will owe federal estate taxes in 2017, or fewer than 0.2 percent of the people who die. A total of 15 states have their own estate taxes, and six more — Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania — also have an inheritance tax. Those taxes can range from 0.8 to 20 percent, and some states have smaller exemptions than the federal one, meaning smaller estates may be taxed.
One of the most effective strategies for lowering estate tax is giving money to your heirs while you’re still alive, and the U.S. tax code provides a number of ways to do that, including outright gifts of cash.
You can also give unlimited gifts to charities while you’re still alive, taking whatever tax deductions those donations generate. Wealth managers often advise clients to do their charitable giving while they’re still alive and can enjoy the results.
“There’s no limit on what you can give to charity,” Geisel says. “Get your name on the building while you can still see it.”
But it’s important, no matter your bank account balance, to make sure you keep enough assets to live on comfortably for the rest or your life. “The person needs to be sure those are assets that they’re not going to need,” says Leslie Thompson, managing principal at Spectrum Management Group in Indianapolis. “Everyone has an estate, whether or not it’s a taxable estate.”
[See: Answers to 7 Burning Tax Questions.]
One big unknown is whether the estate tax will actually last or whether the rules will change by the time you die. That makes estate planning challenging.
“Right now we’ve got a president who wants to do away with the estate tax,” says Kimberly Foss, president of Empyrion Wealth Management in Roseville, California, and the author of “Wealthy By Design.” “I’m not doing anything right now until we see what the tax reform is going to be.”
The best strategy for avoiding or cutting estate tax obligations will vary by person, and a good financial adviser and estate lawyer are essential. The use of various types of trusts can often cut estate tax obligations.
Here are six easy ways people can give money to their heirs tax-free while they’re still alive and also cut their estate tax obligation:
Give generous gifts. Under current federal law, you can give any number of people $14,000 a year with no tax consequences to you or to them. Each member of a couple can give this amount annually. That means a couple could give a married child and spouse (another couple) $56,000 per year. If the couple has children, add another $28,000 (from husband and wife) for each child. If you give bigger gifts, you may owe gift tax, but you can also take what is called a “unified credit” against the $5.49 million estate tax exemption. Whatever you take during your life is subtracted from your exemption after you die. The gifts don’t have to be cash but can be stock, real estate, collectibles or other assets.
Pay medical bills. You can pay an unlimited amount of medical bills for other people as long as the payments go straight to the medical facility.
Pay tuition. You can pay private school or college tuition for children, grandchildren or anyone you want, with no limit on the amount, as long as the payments go directly to the school.
[Read: 9 Tax Changes to Know Before Filing Your 2016 Return.]
Contribute to a 529 college fund. Parents, grandparents or anyone else can contribute up to $14,000 a year to a 529 college fund. There is also an option to contribute $70,000 per person upfront, as long as no more gifts are given to the recipient in five years.
Start a foundation. Your name doesn’t have to be Trump, Clinton or Gates to start a family foundation. A foundation created to benefit charities of your choice provides a number of tax benefits, including the ability to cut your estate tax liability. If you’re interested in starting a foundation, consult an estate lawyer who can provide guidance on the rules and requirements.
Transfer second homes. If you transferred your beach home to your son outright, the value would exceed the $14,000 you could give him every year. But you can transfer the home into a Qualified Personal Residence Trust, which would give you the right to use it for whatever term you specify in the trust documents. If you outlive the trust, you would then pay the trust rent for your right to stay.
More from U.S. News
Sell This, Not That: How to Manage an Estate Sale
No Kids? You Still Need an Estate Plan
12 Ways to Ensure You Don’t Run Out of Money in Retirement
A Charitable Way to Cut Your Estate Tax Obligation While You’re Still Alive originally appeared on usnews.com
