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.