Many people don't spend much time thinking about what their heirs will have to pay in taxes after they die. It's true that most people who inherit won't have to pay any federal taxes. (The current exemptions mean that only estates of more than $5.43 million will be assessed taxes.)
However, that doesn't mean that your heirs won't have to pay any state taxes. The threshold is much lower in many states, often making the value of your primary residence put you over the limit. Fortunately, there are many easy (and legal) things you can do to reduce these taxes.
1. Make a will. If you do only one thing in your estate planning, it should be to have a will prepared for you and sign it. Without a will, the courts will decide who gets your assets, adding fees to cover the time they spend sorting through your estate. They also will distribute your assets without much thought to the potential tax consequences. Don't be one of the more than 55 percent of Americans who don't have a will.
2. Consider a "transfer on death" deed for your property. You can forgo taxes for the lifetime of your spouse by transferring your property to him or her either before or upon your death. However, when the surviving spouse dies, his or her estate will have to pay estate taxes on the property.
3. Leave your cash to charities and your insurance to people. The proceeds from your life insurance policies are not considered part of your taxable estate. In addition, money you leave to charities, like your church, the animal protective league and/or your college, come right off of the value of your estate and are not subject to tax. Therefore, it makes sense to leave your cash to your favorite charities and remember your family and friends with your insurance policy.
4. Make large gifts. The IRS and most state laws allow individuals to make annual tax-free gifts of $14,000 per person. If both spouses make such gifts to children, grandchildren and other important people, this can reduce the taxable amount of a couple's estate by $28,000 per recipient per year.
A good estate planning attorney can not only prepare and update a will for you but also help you tailor a plan for your assets that's right for you and your family. No one wants to think about dying, but taking some time to prepare in advance can save your loved ones time, effort and, most importantly, money.Share