When you create wealth, you typically pay tax on it at the time. Yet, if you are not careful, you could end paying tax twice: once when you earn the income and again when you leave it to your family.
You may need to reduce your estate’s value to keep it beneath the threshold at which you would pay federal estate tax. The figure is currently $11.7 million, but this is scheduled to drop considerably in the next few years.
How can you reduce your estate?
There are several ways to reduce the value of your estate:
- Give some to charity: The Internal Revenue Service (IRS) allows you to give away a certain amount of money free of tax. Aside from the tax advantage, it can be satisfying to help others.
- Gift it to your family while alive: The IRS sets a yearly limit you can give to someone tax-free. Currently, it is $15,000. It also puts a total lifetime figure you can give away, which is now over $11 million. The sooner you start gifting, the closer you can get to using your lifetime allowance.
- Move assets into trusts: Trusts have many advantages. They can protect your money from creditors as well as the IRS. You could use them to prevent beneficiaries from squandering their inheritance. Assets you place in a trust are no longer part of your estate, so do not count toward the federal estate tax limit.
The sooner you start to create tax strategies, the more of your assets you can protect, and the more you can pass to your family instead of the IRS.