When drafting an estate plan with an attorney, many people raise questions about estate taxes. Estate taxes, also known as death taxes, are the fees the federal government collects when an estate passes along to its heirs.
Notoriously expensive, estate taxes can claim nearly half of the estate’s value in cash within nine months after death. Since most estates do not have this much cash on hand, grieving families must often liquidate assets and property to cover the costs. These demands make a painful situation even more heart wrenching, as many families must sell off prized family possessions or property to cover these taxes.
Thankfully, there exist several methods for preserving inheritances and assuring that one’s hard work will continue to provide for their family after they are gone.
Avoiding taxes with trusts
Though many kinds of trusts exist, only “irrevocable” trusts avoid estate taxes. Individuals relinquish ownership of assets placed into an irrevocable trust — the trust itself owns the assets and distributes them per the terms of the trust. There are a few different types of irrevocable trusts:
- Qualified Personal Resident Trust (QPRT): A QPRT holds a home as its only asset, keeping the real estate in a tax-free haven for the duration. A QPRT freezes the home’s value and reduces estate size, granting ownership to the heirs upon completion.
- Bypass trust: A bypass trust houses an amount of money up to the exemption limit for estate taxes ($11.4 million as of 2019). Moving this money reduces the size of the estate immediately while still allowing beneficiaries access. If a husband were to set up a trust for his wife, that money would also pass tax-free onto their heirs upon her death.
- Irrevocable Life Insurance Trust (ILIT): Life insurance payouts are exempt from income taxes, but not estate taxes. Placing these policies in trust, funded with cash enough to pay for the premiums, avoids death taxes and reduces the size of an estate. After a grantor dies, the payout goes into the trust for the benefit of the spouse or heirs.
- Charitable giving: Placing assets into a charitable trust can lower the value of the estate and help secure a tax break. These trusts regularly pay out to charities over the years then pass the remainder on to beneficiaries upon the grantor’s death. Some charitable trusts can even hold appreciating assets like stocks.
Secure legal help
Managing a large estate is quite complex and many people benefit from securing the help of a local attorney familiar with estate planning to navigate this dense paperwork. Anyone with questions about tax-free trusts can find answers with a lawyer today.