5 Ways to Reduce Estate Taxes


As per federal law, estate values of up to $11.4 million are exempt from taxation upon their transfer from a deceased person. This leaves most Americans outside the taxable bracket. However, even if you are exempt from an estate tax, in certain state jurisdictions, or if you are residing in a foreign country, there may also be inheritance taxes to worry about. This can take a major chunk of the proceeds upon your death away from the intended beneficiary. Fortunately, there are plenty of means through which you can reduce or even eliminate the tax burden. Here are some completely legal ways to reduce inheritance taxes or even eliminate them altogether.

Note: Residents of Texas will be happy to know that it is one of those states that does not have any inheritance taxes. However, many of the methods shown here can also be used to successfully lower your federal estate tax liability.

1. Create an Irrevocable Trust

There are certain types of trusts available that may not be counted as part of your estate, and thus, may not be subject to an inheritance tax upon your death. Revocable Living Trusts are not such a vehicle, but many irrevocable trusts might just do the trick. One specific type of irrevocable trust is a CRT (Charitable Remainder Trust). With a CRT, you’re giving assets (typically highly appreciated stocks, real estate, commodities, businesses, paintings, etc.) to the CRT, then CRT then sells the asset without incurring a capital gain, you get a tax deduction (based on a calculation that includes income to you, the time value of money, and the expected remainder of the assets to be passed to a charity at some future point) and the charity receives the balance of the assets at some point in the future (for example, at your death). One thing to consider with some irrevocable trusts is that you may lose some, or all, control of the assets and it may trigger a gift tax return or even a gift tax. There are options and they may or may not be right for you. We encourage you to speak with a qualified attorney and CPA to discuss your particular situation and to determine what strategies, if any, may be most beneficial to you.

2. Gift Assets Now

As of right now, the maximum gift amount exempt from the taxable bracket is $15,000 per spouse. You can transfer plenty of your assets to your intended beneficiary tax-free by gifting them while you are still able to.

To illustrate with an example, in the state of New Jersey, if you want to transfer assets totaling a value of $40,000 to your sibling, it will be subject to an 11% tax. Only assets valued under $25,000 are subject to no inheritance taxes for this category. Thus, by gifting part of the value to them during your lifetime, you can effectively avoid the tax. Please speak to your CPA about any gifting strategy, as this general information in no way shall serve as tax advice.

In Texas, there’s no death tax or inheritance tax. If you’re married and you want to give your kids money, then you can do so. If you have 4 kids, then you and your spouse could gift each of them $15,000 annually which means that you could pass $120,000 annually to your children without triggering gift tax consequences and without eating into your lifetime exclusion amount. So in that example your entire $11.4M+ per spouse would still be preserved. If you have over $15,000 per person, then your CPA would need to file a gift tax return. Most likely it would be a zero tax due return, as it would simply eat into your lifetime exemption amount.

3. Move to a New State

The following list of U.S states currently collect an inheritance tax:

· Iowa

· Kentucky

· Maryland

· Nebraska

· New Jersey

· Pennsylvania

If you are situated in any of these states and want to avoid death tax liabilities on your asset transfer, the best decision you might make could be to move to another state with friendlier laws. Of course, such as decision may not be easy for everyone because of friends, family, relationships, jobs or businesses. However, it’s one opportunity that some people take advantage of. For example, I personally know of tons of people who have moved out of California and New York for the sole purpose of reducing the current and expected future taxes. I tell you what, if states overtax their constituents, then it will probably come back to bite them. Here in Texas, we have great lives and low taxes, and that’s a winning combination.

4. Create a Life Insurance Strategy

Life insurance may help you provide coverage for any inheritance or estate tax liabilities imposed upon your death. Furthermore, any death benefit that your beneficiary may receive from the insurance will not be counted as taxable income. That’s because inherited life insurance is not subject to income taxes or capital gains taxes in Texas. However, the life insurance proceeds will likely be part of the taxable estate. But remember that your estate has to be large based on today’s laws for any estate tax to be imposed. There are multiple tax considerations in play here, such as estate taxes, income taxes, capital gains taxes, state death/inheritance taxes, and gift taxes. So make sure you speak to your estate planning attorney and CPA about the difference between each of them.

In regards to estate planning, it can be important that you name the proper beneficiary on your life insurance policy. If you leave it blank, then it’s paid to your estate. If you name someone who dies before you, then you could have issues. If you name a person who was once your spouse, but who is no longer your spouse, then you could have issues. So it’s important that your beneficiary options be updated frequently and in concert with your estate planning attorney, CPA and financial advisor.

One technique for avoiding estate taxes is to set up an ILIT, an irrevocable life insurance trust. With such an arrangement the ownership is not considered owned by the person who sets it up. Let’s call him “dad.” Instead it’s considered owned by the child and it’s just based on dad’s life. If set up properly, then none of the proceeds will be subject to federal estate taxes. That’s true even if it’s a $20 million policy. Work with an estate planning attorney to make sure you set this up correctly.

5. Start Spending, Sharing & Giving To Charities Now

In your twilight years, it might make little sense to keep a tight hold over your estate knowing fully well that many of your assets being passed to your beneficiaries will in fact be diverted to the government instead of to your children and grandchildren. You have worked hard to build up your wealth, so you deserve to enjoy it. Go on vacations and enjoy the fruits of your labor. Sometimes I see people who spend to much. But sometimes I see people spend to little. If you have a large estate, then the latter may be an issue. So get with an estate planning attorney, CPA and financial advisor and determine what amounts you can afford to spend, what amount you want to spend, what amount you should give to your beneficiaries now and what amounts you should leave to charity. One of the greatest joys that I see in many people is sharing their wealth with others while they’re still living, rather than waiting to share that wealth post-death. It’s one thing to say here are the leftovers after I pass. It’s an entirely different thing to give away money now and watch the amazing affects that your money can have on charities, family members and even strangers.


Hire an Estate Planning Attorney

Estate planning is complicated and it’s never easy on your own to create a succession plan best suited to your family’s circumstances. An estate planning attorney can lend his professional knowledge and expertise to help you avoid costly mistakes and ensure that you have an estate plan that fits your unique circumstances. Book a free consultation with one of our expert lawyers today by calling 888-407-2407. Mike Massey Law would be honored to have a conversation with you.

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Mike Massey JD, MBA, MPA just might be the 195th most interesting person in Texas. He has 4 college degrees and he's working on a 5th:  BBS Accounting; MPA Master's in Professional Accounting; JD Law Degree; MBA Master's in Business Administration; BBS in Biblical Studies (in progress).

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© 2020 Mike Massey Law.  Managing Attorney Mike Massey, 8911 Capital of Texas Hwy, Ste 3210, Austin, TX, 78759.  Email: mike@MyTxWills.com.  Phone: 888-407-2407.  Mike Massey, Texas Bar # 24032584. The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls, letters and electronic mail. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established. Privacy Statement.  Prices can vary based on your unique situation and potential add-on services.  Prices for in-office (in person) meetings typically cost more than virtual meetings that are done over the phone instead of in person.  Prices for virtual estate planning do not include an execution ceremony or notary, as those services are not available with our discounted virtual estate planning packages.