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An estate tax is the amount of taxes owed to the federal government upon your death. Your family’s tax liability will depend on two things:

1. How much your estate is worth

2. How much estate planning you accomplished during your lifetime


No one wants to think about leaving their loved ones with a heavy tax burden, which is why it is so important to speak with your certified financial planner to begin the planning of your estate as soon as possible. Even if you don’t think that you have a large number of assets, you would be surprised at the amount that the value of your cars, stocks, bonds, property, retirement accounts, etc. will total once your financial planner calculates it for you. Fortunately, there are several ways to avoid estate taxes, and this article will discuss some of the options available to you.

Avoiding Estate Tax Using Tax-Free Gifts

You are allowed to give up to $11,000 per calendar year without paying gift tax to whomever you choose. This includes donations to charities, paying for someone’s tuition or medical bills, contributing to a college savings 529 account, etc. This type of gift reduces your estate and, subsequently, the estate taxes to be assessed.

Avoiding Estate Tax Using a Revocable Living Trust with an AB Provision

With this type of trust, as spouse leaves up the exemption amount of their property in an irrevocable trust for the surviving spouse and children, and the surviving spouse has the right to use the funds when needed. This can make a dramatic difference in the amount of estate tax owed when the second spouse dies, because the exemption amount of both the first and second spouse are used instead of just that of the last spouse to die. The AB trust is usually established using a Revocable Living Trust. It should be noted, however, that this marital deduction may not apply in cases where the spouse is a U.S. citizen, even if they are a legal resident. In this case, proper wording of your will is necessary in order to prevent your spouse from being responsible for paying estate tax.

Avoiding Estate Tax Using Various Other Trusts:

There are many different types of trusts that can help you avoid leaving your loved ones and beneficiaries with the financial burden of estate tax. These include:

Q.T.I.P. Trusts:

These trusts enable couples to avoid further problems that can arise when one spouse passes away and the surviving spouse automatically inherits the estate. These types of trusts, like most others, are subject to regulations that vary by state, so you should ask your financial planning advisor for advice regarding your specific situation.

Charitable Annuity Trusts:

These types of trusts involve making a sizeable gift to a foundation, and in some cases, establishing a private foundation in your name, or a beneficiary’s name of your choosing.
An Irrevocable Personal Residence Trust: This type of trust is an excellent estate planning tool for larger estates, especially those that include a house that has appreciated significantly in value. As owner of the residence, you can place your house into the personal residence trust during your lifetime, but your beneficiaries must wait a certain number of years before they receive the house. Through the personal residence trust, you remove a substantial asset (namely: your house) from the estate, but will be assessed a gift tax on only a portion of the value of the asset, securing a savings of many thousands of dollars.

An Irrevocable Grantor Retained Annuity Trust:
This trust works on the same principle as the personal residence trust, except that it is designed for assets other than a house. They work very well for any asset that has appreciated or is appreciating in value. For example as shareholder, you could place your stock into this type of trust for a term of ten years, with your children as beneficiaries. This gift savings tax would be similar to those achieved through a personal residence trust.

This type of trust is useful for an appreciated asset that is not producing much income. For example, you may decide to give your vacation home to your favorite charity using a charitable remainder trust. Since charities are exempt from capital gains tax, the charity can sell the home for its fair market value and invest the entire proceeds according the provisions of the trust. You would receive a fixed dollar amount every year, at the rate of five percent or more of the value of the trust, and assuming the principal is invested well, when you die the original principal will remain and will be owned by the charity. This give s you the satisfaction of knowing that you have made an important gift to a charity, have established an income for yourself for the rest of your life, and have arranged for a substantial deduction on the amount of estate tax due from your estate when you die. The financial decisions that you make today can impact the financial well being of your family for generations to come, which is why it is so important to begin planning your estate as soon as possible, if you haven’t already. Contact your financial advisor for more information and for advice on all types of financial and estate planning topics.