Leaving behind a legacy is less effective when an estate must pay state and federal estate taxes. Smart Asset explains that the executor or administrator of the estate must pay these taxes before distributing the remainder to beneficiaries. While some states do not have an estate tax, Illinois does. Only estates valued greater than $11.4 million pay federal estate taxes, and Illinois requires estate tax on those valued greater than $4 million.
Is there anything people can do to avoid paying estate taxes?
Smart Asset notes that giving beneficiaries their inheritance early as yearly gifts may reduce the estate to below the federal and state thresholds. However, the limit on a single gift is $15,000 before the giver must worry about paying a gift tax. The limit over a lifetime is $11.4 million.
Someone could also give to charity to reduce the value of the estate and avoid taxes. One effective method is to set up a charitable remainder trust and transfer assets to it. The trustor receives the investment income from the assets, but they become the property of the designated charity when the trustor dies. This also allows the trustor to avoid paying capital gains tax and to receive a tax deduction.
Set up trusts
Any irrevocable trust is likely to lower estate taxes because the assets in the trust no longer belong to the estate. The assets go directly to the beneficiaries upon the death of the trustor. The trustor hands control of the assets to a trustee and cannot make changes to the assets’ ownership, though.
Because life insurance proceeds may become part of the estate, a person could instead create an irrevocable trust and transfer the ownership of the life insurance to it. The death benefits would consequently belong to the trust for the trustee to manage and distribute to the beneficiaries.