How does it feel when you have paid taxes your entire life only to be potentially hit with the largest tax when you die? Depending on your situation, it can really sting, and a large portion of what you planned on leaving to your beneficiaries may end up going to Uncle Sam.
There are a number of options out there that can assist in avoiding various taxes, but it is important to understand that each person’s situation and needs are different. It is very important to talk to a qualified estate planning attorney to avoid making costly mistakes.
The main idea is to try and reduce the size of your estate, thereby reducing the amount of your estate that is exposed to estate taxes. For example, if you or your spouse has a large life insurance policy, you can create an Irrevocable Life Insurance Trust (ILIT) to protect these funds from adding to your estate for estate tax purposes. This can be funded with either a new policy or an existing policy, but it is important to note that if an existing policy is placed into an ILIT there is a 3-year look back period. If the insured dies within the 3 years then the value of the policy can be brought back into the estate for estate tax purposes. An ILIT with a new policy does not have a look back period. Simply speaking, if the ILIT “owns” the policy then it is not counted in your estate because it is no longer under your name. This is a very simplistic definition and is meant to convey only the basic principle of minimizing an estate size for taxation purposes.
Another option to minimize your estate for taxation purposes is to strategically use your lifetime gifting exemptions. If you have property or other assets that may have a depressed value currently but have the potential for future growth, you can gift using today’s dollars and eliminate not only the assets current value from your estate but also the future growth.
These are only two very basic tools that can be used to lower the value of your estate and thus lowering the amount your estate will owe in estate taxes. There are many other options available, such as a Qualified Personal Residence Trust to get a valuable home out of an estate or a Family Limited Liability Limited Partnership. Each situation is different but a customized plan can be created for you and your family to specifically address your needs and concerns.
Contributed by MH Phoenix and Cave Creek Estate Planning Attorney West Hunsaker.
About Morris Hall:
At Morris Hall, we have focused our legal practice on estate planning for over 40 years. Along with estate planning, our attorneys help clients and their families with matters of probate, trust administration, wills, power of attorneys, business planning, succession planning, legacy planning, charitable gifting and other important legal aspects. We also have divisions in financial, real estate and accounting to help you incorporate all of your planning together, ensuring that everything works perfectly for your needs and situation. Our Arizona offices are located in Phoenix, Mesa, Scottsdale, Cave Creek, Tucson, Prescott, Flagstaff and Arrowhead. Contact us today at 888.222.1328 to schedule an appointment!
This blog should be used for informational purposes only. It does not create an attorney-client relationship with any reader and should not be construed as legal advice. If you need legal advice, please contact an attorney in your community who can assess the specifics of your situation.
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