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Inheritance Taxes


You may wish to consult with an accountant as well as an attorney as you plan for the disposition of your assets. Transferring money and property to people through a will creates a taxable event as inheritances are subject to federal and state (if any) estate taxes. There are steps you can take to minimize how much of your estate will be taxed, however.

One way to shield your estate from inheritance taxes is to begin disbursing it before you die. Most gifts you make are not subject to taxes. With this in mind, you can dole out your estate in yearly increments of the Annual Exclusion Limit (AEL) or less per year per person and avoid paying taxes on those gifts. Your spouse may also gift up to the Annual Exclusion Limit (AEL) per person per year without interfering with your own gift exemption. This means that a married couple may gift up to twice the Annual Exclusion Limit (AEL) to a single person in any given year without that gift generating a taxable event for the giftee. The Gift tax Annual Exclusion Limit (AEL) tends to change annually in increments of $1,000 so as to keep pace with inflation. Be sure to consult with a tax professional before giving large gifts so as to understand the most current limits. Here is a great website to look at for the current Gift tax Annual Exclusion Limit https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes 

Federal law permits you to leave your entire estate to your spouse without incurring taxes. The downside to taking advantage of this strategy is that it does not shield your estate from taxes upon your spouse's death. A substantial amount of your estate may be subject to inheritance taxes when your spouse dies.

To take advantage of the spousal exemption from inheritance tax, you need to create a Marital Bypass Trust. Your estate is transferred into the trust, which bypasses taxes, and and permits your spouse to benefit from income earned by the trust (such as investment income) for the remainder of his or her her lifetime. Upon your spouses death, the money in the Trust can be reassigned to new beneficiaries (but note that estate taxes may be due at this time). You should consult an attorney before creating a Marital Bypass Trust.

Life insurance offers another avenue for shielding your estate from taxes. To take advantage of this strategy, you direct your beneficiaries to take out life insurance policies on your life. The proceeds of life insurance policies owned by people other than yourself (e.g., your spouse or children) are generally not taxable provided that the beneficiary of the policy is not your estate. If you plan carefully, you can use life insurance to help shield your beneficiaries from having to pay estate taxes on their inheritance. For example, your beneficiaries can use the proceeds from a life insurance policy they own upon your life to offset estate taxes and other expenses.