When you create your estate plan, chances are, one of your priorities involves maximizing the amount of money you get to leave behind for your loved ones. While there are many different steps you can take in your efforts to do so, one way you can increase the amount you leave behind involves reducing how much your beneficiaries pay in estate tax.
Reducing estate taxes allows you to leave more of your legacy behind for the people and things that matter most, and there are several methods you can use to reduce estate tax.
1. Utilizing trusts
Establishing a trust is one method many people use to reduce the amount of taxes assessed on their estates. While trusts come in a variety of different formats, such as living trusts, irrevocable living trusts and special needs trusts, among others, many trusts offer the same key benefits, and one is a reduction in estate taxes. When you place your assets into a trust, they essentially become the property of the trust, and when assets leave your direct ownership, they do not factor into the overall value of your estate.
2. Giving away your wealth now
If, say, you have adult children or other beneficiaries whom you trust to spend responsibly, you may want to consider giving away some of your wealth now. Whether in one lump sum or in periodic payments, giving away wealth now will reduce the amount of taxes assessed on your estate, meaning your heirs will end up with more in the long run.
3. Purchasing extra life insurance
If you are a particularly high earner or someone who has a higher-than-typical net worth, you may want to consider creating an irrevocable living trust you can then use to purchase extra life insurance. As long as you purchase the policy through this method, it will not add on to your estate’s overall value, and it can help you cover the burden of estate taxes without having to tap into what you intended to leave behind for your loved ones.
These are some of the common methods you can utilize to reduce taxes on your estate, but this is not an exhaustive list of all possible tactics you might be able to employ to do so.