When it comes to estate planning it’s important to remember that death often comes with taxes. For those who want to be sure that their estates pay as few taxes as possible it’s important to plan ahead and to know all of the options that one can take advantage of when keeping money tax free.
When two people are married they are considered to share their estate. This means that when one spouse dies the other may inherit the estate free of tax. The caveat in this law is that it only applies on federal taxes (states each have their own tax laws), and it only applies to the first spouse. If someone remarries and outlives another spouse then this same transfer of estate will not work.
Marital and Charitable Gifts
Estates that are not in excess of $2 million have little to worry about in terms of estate taxes. Anything up to that amount will have minimal fees, if there are any at all. Amounts over the $2 million are subject to taxes, unless they’re given to spouses and charities (to a certain amount). Donations to charities and gifts to family members that are decreed tax free reduce the total amount of the estate. If these gifts and donations reduce the amount to below the $2 million mark then there are no tax issues to worry about. This is one reason why so many wealthy individuals leave so much money to charity when they die; they often believe in the cause, but the tax advantages are also important considerations.
For those who are serious about their estate planning a good strategy is to give gifts or dispensations to people while one is still alive. There are rules for gifts during one’s lifetime that are tax free, and these can often be taken care of before an individual dies. These are called gifts to third parties, and they can take a lot of pressure off of an estate by reducing its amount before an individual dies.
Planning is Everything
Estate planning is just like any other area of financial preparation; it’s important to have it all worked out before hand, and to adjust that plan as the needs of the estate changes. For instance, if someone has a $5 million estate, but manages to gift over $1 million of it to people during his or her life then the estate is worth $4 million. If end of life care eats up half of that remainder then there’s $2 million left, and no need to worry about taxes. If, on the other hand, there’s $3 million left at the time of that person’s death it’s important for donations to charities and a spouse to be put down in writing and carefully understood so that when he or she can no longer make changes the plan is complete and up-to-date. While avoiding taxes is illegal, reducing the amount you have to pay on estate taxes just takes solid, legal planning.