Introduction
Inheritance tax is an often misunderstood and overlooked aspect of estate planning. It is a tax imposed on the estate of a deceased person, based on the value of their assets at the time of death. The tax rate can be as high as 40%, so it is essential to take steps to reduce or eliminate your potential inheritance tax liability. This article will provide you with some tips to help you reduce your inheritance tax bill.
Understand Your Inheritance Tax Liability
The first step in reducing your inheritance tax liability is to understand it. The current threshold for the inheritance tax in the UK is £325,000 per individual, or £650,000 per couple. This means that if the value of your estate is less than the threshold, then it is exempt from inheritance tax. Anything over the threshold is taxed at 40%.
In addition to the threshold, there is also a residence nil-rate band (RNRB). The RNRB is an additional threshold that applies to those who pass on their home to their children or grandchildren. The current RNRB is £175,000 per person, but it is set to increase to £175,000 in April 2020. This means that for couples, the RNRB can be as high as £350,000.
Create a Will
Creating a will is an important step in reducing your inheritance tax liability. A will is a legal document that outlines how your estate should be distributed after your death. By creating a will, you can make sure that your assets are passed on to your loved ones in the most tax-efficient way.
One way to reduce your inheritance tax liability through your will is to make gifts to your beneficiaries while you are still alive. This is known as a “lifetime gift,” and it can be an effective way to reduce your estate’s value and therefore your potential inheritance tax liability. It is worth noting, however, that there are some rules and limits to lifetime gifts, so it is best to seek advice from a professional.
Make Charitable Donations
Another way to reduce your inheritance tax liability is by making charitable donations. Gifts to charities are exempt from inheritance tax, so if you leave a part of your estate to a registered charity, it will reduce the total value of your estate and therefore your potential inheritance tax liability.
In addition to reducing your inheritance tax liability, making charitable donations can also have a positive impact on the world around you. You can leave a legacy and help support your favourite causes even after you’re gone.
Use Trusts
Trusts are a legal arrangement that can help you manage your assets and reduce your potential inheritance tax liability. There are various types of trusts, including bare trusts, discretionary trusts, and interest in possession trusts.
One way to use trusts to reduce inheritance tax is to set up a trust for your beneficiaries while you are still alive. This is known as a “lifetime trust,” and it can help you reduce the value of your estate, thereby reducing your potential inheritance tax liability.
Another way to use trusts to reduce inheritance tax is to set up a trust in your will. This is known as a “will trust,” and it can help you ensure that your assets are passed on to your beneficiaries in the most tax-efficient way possible.
Maximise Business Relief
If you own a business, then you may be eligible for business relief. Business relief is a tax relief that can help reduce the value of your estate, thereby reducing your potential inheritance tax liability.
To be eligible for business relief, your business must be a qualifying business, and it must be active for at least two years. If you meet these criteria, then you may be able to claim up to 100% relief on the value of your business.
Seek Professional Advice
Inheritance tax can be a complicated topic, and it is essential to seek professional advice from a qualified professional. An expert can help you identify ways to reduce your inheritance tax liability and ensure that your assets are passed on to your loved ones in the most tax-efficient way possible.
In conclusion, reducing your potential inheritance tax liability requires careful planning and thought. By understanding your inheritance tax liability, creating a will, making charitable donations, using trusts, maximizing business relief, and seeking professional advice, you can reduce your inheritance tax bill and ensure that your assets are passed on to your loved ones in the most tax-efficient way possible.
Tips to Reduce Your Inheritance Tax:
Marital Transfer: Arguably the most widely-used means to reduce your inheritance tax, all lifetime gifts at the time of death to your spouse will not be subject to estate taxes. The Internal Revenue Service permits your spouse to transfer an unlimited amount of assets to you as a tax-free gift. That being said, the government has capped the monetary amount to $13,000 per year. If you exceed this cap you will be forced to use your unified credit exemption. Marital transfers are not permitted if your spouse is a noncitizen of the United States.
Giving Gifts: The federal government allows you to make annual tax-free gifts of $13,000 to any number of people–typically these gifts are offered grandchildren or children. As a result, you and your spouse can collectively give out $26,000 per year to your kids or grandkids.
Create a Credit Shelter Trust: Creating this type of trust will allow you to reduce your inheritance tax rate. Also referred to as a bypass trust, the credit shelter trust is regarded as the most effective estate planning tactic.
When your spouse passes away, if his or her assets are transferred to you, you will lose the ability to use your spouse’s unified credit exemption. When you create a credit shelter trust, you can transfer up to $3 million without facing the inheritance tax.
When creating a credit shelter you must do the following:
• Establish a trust that takes advantage of the unified credit tax exemption
• Name your beneficiary (typically your spouse) to receive income from the trust
• State the names of all of your final beneficiaries to the trust
• Transfer your assets to the final beneficiaries to avoid the inheritance tax.
Set-up a Qualified Terminable Interest Property Trust: A QTIP trust is typically used to complement the establishment of credit shelter trusts. When combined, a qualified terminable interest property trust has the ability to eliminate all inheritance taxes upon the death of your spouse. A qualified terminable interest property trust is a special way to take advantage of the unlimited transfer of assets to your spouse. The following will elucidate how a QTIP works:
• You must transfer your assets into a qualified terminable interest property trust that is part of your spouse’s estate.
• You will then be able to name the final beneficiaries of your trust.
• While your spouse is alive, she or he will receive income generated by the trust.
• When your spouse passes away, the assets will pass to the named beneficiaries.
This shift of assets to your spouse whose–taxable estate is lower than yours—will reduce, or even eliminate, the inheritance tax owed.
What is the Inheritance Tax?
Commonly referred to as an estate tax, the inheritance tax is a levy paid by an individual who inherits money or property from a person who has recently died. The tax is a percentage of the total value of the property and money inherited. Although the two terms (estate and inheritance tax) are often deemed synonymous the two taxes are inherently different in some nations: the estate tax is assessed on the assets of the deceased party, whereas the inheritance tax is assessed on the legacies obtained by the beneficiaries of the inheritance or the estate.
In the United States, the estate and inheritance tax are analogous. The inheritance tax in the U.S. is imposed only on the transfer of a deceased party’s “taxable estate.” These assets may be transferred through a will or otherwise. The entities responsible for imposing the inheritance tax in the United States are the Federal Government and several state governments.
Understand the Federal Inheritance Tax:
In the United States, state and federal inheritance taxes are some of the most onerous types of taxes. Not only is the inheritance tax right exceedingly high, the average American has very little knowledge of the levy.
To simplify the levy, we will only discuss matters involving the Federal Inheritance tax, which of course, is imposed by the Internal Revenue Service. The federal inheritance tax is a levy on your right to transfer property at the time of your death. The inheritance tax accounts for everything you own or have a certain interest in at the time of your death. The inheritance tax is calculated based on the fair market value of your assets—the price you paid for the assets is not used in the calculation. The tax is implemented based on the total gross market value of your assets, including all property, cash, securities, insurance, trusts, annuities, real estate ventures, business interests and other assets.
After you have accounted your Gross Estate, particular deductions are permitted to arrive at your Taxable Estate. These deductions will include your debts, including your mortgage, and your property that is transferred to qualified charities or your surviving spouses.
After computing your allowable deductions, the net amount is computed. Frequently, simple estates will not require the filing of an inheritance tax return. Filings are only required for estates with prior taxable gifts or combined gross assets in excess of $3.5 million for decedents dying in the taxable year of 2009 and $5 million or more descendants who pass away in 2010 or later.
Before going over the ways to reduce your taxable amount and effectively decrease your inheritance tax, you must understand that Congress may enact different legislation that overrides the aforementioned schedules. For example, the inheritance tax in the United States was repealed for 2010 and the beginning of 2011.
