Currently the federal estate tax exemption is $3,500,000. Many states also assess estate taxes on assets owned by their residents and on real estate owned by nonresidents - Connecticut, Delaware, D.C., Illinois, Kansas, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Rhode Island, Tennessee, Vermont and Washington. Seven states also collect an inheritance tax - Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. For people whose estates are taxable at the state and/or federal level, they have five options for reducing their estate tax bill.
1. Spend their assets.
This is the quickest and easiest way to reduce the value of an estate. The obvious problem with this approach is that no one knows how long they will live and how much money they will need. Thus, drastic spending is only an option for people who have accumulated a significant amount of wealth and aren't afraid of running out of money before they die.2. Gift their assets directly to family members or charity.
This option will only work well for those who feel comfortable giving away part of their estate while they're still alive. As mentioned above, often times people are resistant to give anything away because they're afraid they'll run out of money before they die and once they decide to give it away, they can't get it back. As with spending it, gifting directly to family members or charity will only work well for those who aren't afraid of running out of money.3. Create a foundational estate plan.
For married couples, the use of basic AB Trusts or ABC Trusts in their estate plan can significantly reduce or even eliminate estate taxes assessed against their estates. For both married couples and individuals, the use of an Irrevocable Life Insurance Trust (or "ILIT") to hold and own life insurance offers two benefits: (1) life insurance owned by an ILIT will remove the value of the insurance proceeds from the insured's taxable estate; and (2) the insurance proceeds can provide immediate cash to pay bills, expenses and taxes.4. Use advanced estate planning techniques.
There are a variety of advanced planning options that are designed to reduce estate taxes and yet allow you to maintain an income stream for life, which should alleviate the fear of running out of money before you die. Gifting through a Family Limited Liability Company offers both estate tax reduction and asset protection. Creating a charitable trust, such as a Charitable Remainder Trust, gives you a charitable income tax deduction when the trust is funded and gives your estate a charitable estate tax deduction after you die. A Qualified Personal Residence Trust allows you to live in your home for a period of years and then the home will pass to your heirs at a reduced value for estate and gift tax purposes after the period ends.5. Move to a new state.
If you currently live in one of the following states that collects a state estate tax and/or an inheritance tax - Connecticut, Delaware, District of Columbia, Illinois, Indiana, Iowa, Kansas, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Nebraska, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Tennessee, Vermont or Washington - then consider moving to a state that doesn't collect an estate and/or inheritance tax. While this may seem to be an extreme option, the bottom line is that for the very wealthy it can mean saving thousands or even millions of dollars in death taxes that will stay in the family instead of going to the government.
