As the saying goes, there are only two guarantees in life and those are death and taxes. While people are taxed on various items throughout their lives, they could also be taxed at their death as well. These types of taxes are known as estate taxes and are generally paid out of the estate by personal representatives or trustees of the estate prior to distributing the remaining assets of the estate to the beneficiaries.
This has the effect of reducing the amount the beneficiaries can receive. Obviously, most people would rather ensure that their beneficiaries receive as much as possible and would rather give them assets instead of the government. There are ways that people can avoid or at least reduce the amount of the estate tax while still ensuring the beneficiaries receive the assets.
Ways to reduce the size of an estate
- One way is to give gifts to their beneficiaries while they are still living. Couples can give gifts up to $30,000 each year tax-free. Over time people can reduce their estate and potentially get it to a point where the estate tax does not apply.
- Set up an irrevocable trust for a life insurance policy or other assets. People put assets and life insurance policies in trusts which cannot be modified in any way that provides the assets of the trust to the beneficiaries. Since they have no control over the trust it can avoid the estate tax.
- Donate money to charities. This can be done during people’s lifetime as well as through trusts which would transfer the assets of the trusts to charities at death
- Set up a qualified personal residence trust. This transfers people’s homes to a trust. For the period of the trust, people will continue to live in the house, but at the end of the term, the beneficiaries would take over control. This will avoid both gift taxes and potentially estate taxes since the change of ownership would reduce the size of the estate.
Estate taxes are not something people in Michigan may think about when they are determining who they want to pass their estate to, but it is important to consider them to maximize the amount beneficiaries will receive. Experienced estate planning attorneys understand the various tools available and may be a useful resource.
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