How to avoid huge inheritance taxes

When a loved one dies, there’s a lot to worry about, from planning a funeral to dealing with your own emotions. However, as is often the case, money is an important part of life’s reckoning when dealing with a recently deceased family member. When they pass, your family will have to deal with their money, assets, and debts. And if they have a large enough estate, you might have to worry about property and inheritance taxes. However, there are things you can do now to limit the amount of money ultimately subject to these taxes so that your family can use more of your wealth to build their own lives. If you need help with inheritance tax or any other financial planning issues, consider working with a financial advisor.

Understanding the differences between inheritance taxes and inheritance taxes

First of all, make sure you know the difference between inheritance tax and inheritance tax. An inheritance tax, sometimes referred to as a “death tax”, is money taken by the government from a recently deceased person’s estate before it is given to their family, friends, and other beneficiaries. There is a federal inheritance tax, and a number of states also levy their own inheritance tax.

Meanwhile, inheritance tax is levied on the money after it has passed to the heir. Money can be subject to both inheritance tax and property tax. There is no federal inheritance tax, but several states do impose inheritance taxes.

The rules for these inheritance taxes vary from state to state. Sometimes inheritance tax is applied only depending on the state in which the heir lives, although it may also matter which state the deceased person lived in. Even the condition of the property, such as a house, that you inherit can affect the situation.

There are many strategies to reduce both types of taxes. For more information on how to reduce potential property taxes, check out this article.

Inheritance Tax Avoidance Strategies

If you think you will receive an inheritance after the death of a loved one, the first thing you should do is check the laws in both the state where you live and the state where they live. If none of them charge inheritance tax, you’re clean. Whenever your loved one dies, you have nothing to worry about. You may have to deal with inheritance tax, but you pay nothing for the money you actually receive.

However, if inheritance tax needs to be considered, there are some things you can do to help reduce your tax burden. Keep in mind that some of these steps will require advance planning and cooperation with the person passing on the inheritance to you. Therefore, if you think you will receive an inheritance, think ahead and discuss with your family member the most efficient way to transfer money.

Arrange to receive money as gifts

If you are going to receive an inheritance from a relative who is getting older, consider talking to him about getting some of it as a gift before he dies. Currently, the annual gift tax limit is $15,000, so a person can give up to $15,000 a year without any tax implications.

Let’s say your grandmother told you that she would leave you $45,000 in her will. If, instead of bequeathing this money to you, she gives you $15,000 a year for the three years before her death, that money will not be subject to inheritance tax. Alternatively, you can invest them in stocks or index funds and have more money by the time she actually dies. If this makes your relative feel better, you can even promise not to touch the money until it is gone.

Use an alternative estimate date

Not all inheritances are cash, as many people receive property, including houses and other real estate. Generally, the value of the property used for inheritance tax purposes is the date of death. However, if the inheritance is also subject to inheritance tax, using a later date—usually six months after death—may be an option. This can lead to lower property values ​​and therefore a lower tax burden.

Buy a life insurance policy with a payout in case of death (POD)

If you take out a death life insurance policy, your beneficiaries will not pay taxes on the money they receive after your death. They can use this money to pay for any other inheritance or estate taxes that are levied. Again, this will require complex planning ahead of time.

Change your place of residence

This may seem like a drastic step, but for some people it might make sense. Remember that not all states levy inheritance taxes, and there is no federal inheritance tax. If you have a place in your life where you can relocate, opening a store in a state with no inheritance tax can end up saving you or your beneficiaries a tidy sum.

Bottom line

Inheritance tax is levied on money after it has been handed over to an heir. Most states have no inheritance tax and no federal inheritance tax. However, even if you live in a state that has an inheritance tax, there are a few steps you can take to minimize the portion of your inheritance that ends up going to the state.

While planning for a legacy can lead to some difficult conversations, it will ultimately leave your family in a much better position after you die. In fact, estate tax planning can be as important as writing a will or creating a trust.

Estate Planning Tips

  • If you or a loved one needs help reducing their wealth or inheritance tax burden, consider working with a financial advisor. Finding a qualified financial advisor is not difficult. The free SmartAsset tool matches you with up to three financial advisors in your area, and you can interview your advisors for free to decide which one is right for you. If you’re ready to find a consultant to help you reach your financial goals, start now.

  • If you’re going to be planning a property and retiring on your own, it’s a good idea to be fully prepared. SmartAsset offers you many free online resources to help you plan for the future. For example, check out our retirement calculator.

Photo courtesy: ©iStock.com/Andrey Dodonov

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