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How to legally avoid Estate & Inheritance Taxes.

TaxBizPro, LLC Posted on: November 4, 2009 16:11

The following are the amounts that are exempt from Federal Estate Tax.

In 2005: First $1,500,000 in assets
In 2006-2008: First $2,000,000 in assets
In 2009: First $3,500,000 in assets
In 2010: First 1,000,000 in assets
In 2011-2012: First 5,000,000 in assets

If your assets (Real Estate, IRAs, Life Insurance, Savings Accounts, CD, Stocks, Bonds, Life Insurnace and any other Investments or Properties) exceed the exemption amounts above, then for every dollar more than the exemption, the Uncle Sam will take following persentages:

Federal Estate Tax Rates
2005: 47 %
2006: 46 %
2007- 2009: 45 %
2010: No Estate Tax
2011-2012: 35%

Besides Federal Estate Taxes, there is also the State Inheritance/Estate Tax. The exemption amount and estate/inheritance tax rates are varied from State to State. Below you can find States that have either Estate Tax or Inheritance Tax. Some State have both taxes – the Estate Tax and the Inheritance Tax. See MD and NJ States below.

Estate & Inheritance Taxes, State Estate Tax Rates

The New Jersey estate-inheritance tax varies from 11% to 16%* based on who will be getting the assets for the deceased. There are different groups or classes of beneficiaries and each class has its own exemption and tax rate. For example; the immediate family members to the decedent are: surviving spouse, the decedent’s parents, grandparents, children, adopted children, stepchildren and grandchildren, are entirely exempt from this transfer inheritance tax. Other beneficiaries such as the decedent’s brothers, sisters, half brothers and sisters, son-in-law and daughter-in-law are allowed an exemption of $25,000, then the inheritance is taxed at 11% for the next $1,075,000* and thereafter at rates from 13% to 16%*. All other beneficiaries are taxed at 15% for the first $700,000 * and then at 16%.

In New York, the first $1,000,000* is exempt from Estate Tax and amounts over that are taxed at rates between 1.6% to 16%*.

In Connecticut, the first $2,000,000* is exempt from Estate Tax and amounts over that are taxed at rates between 5% to 16%*.

The IRS and most States require that the Inheritance-Estate Tax is paid within 9 months after the decedent’s death.  This creates a huge burden on beneficiaries that will need to come up with the money within this short period of time.  Imagine if you have a large Real Estate property that’s worth couple of million.  And now you have to come up with the money to pay the estate tax.  It’s not a problem if you have enough liquid money (cash, investments, etc.) to pay the tax, but if you don’t?  Your options are: to borrow the money or to sell the property so you can pay the estate taxes.  If you borrow the money you will need to pay interest and fees on that loan.  If you want to sell the property, depending on the condition of the real estate market, 9 months might not be enough time.  So you will need to do a fire sale and discount the property so it can be sold faster.  As you can see in both cases it will cost you way more than just the estate taxes.

One of the ways to legally avoid these enormous estate taxes or the need for cash to pay those estate taxes is through Life Insurance, Estate Planning e.g. Wills, Trusts and other asset protection planning.

Life Insurance: This is the most common way to pay for the unexpected estate tax bill. Generally the proceeds from the life insurance death benefits are not subject to income tax, but are included in decedents estate and thus subject to estate/inheritance taxes. If you do the life insurance planning properly you can exclude all of the proceeds of life insurance death benefit from deceased estate and avoid estate/inheritance taxes as well.  This is done by creating ILIT (Irrevocable Life Insurance Trust**).

Estate Planning – Trusts and Wills:  An estate attorney will create an estate plan that will legally remove your assets from your taxable estate.  Its accomplished by creating a Will, and/or a Trust(s).  Depending on the estate plan, you can have a Revocable Trust or Irrevocable Trust or both.  There are over twenty different types of Trusts and all have different estate tax implications.

If you are interested in learning more about verious Estate Tax Strategies, ILIT and Trusts, please contact us for more information.

Yes, you can legally avoid the huge Estate-Inheritance Tax bills?

*The exemption amounts and tax rates may change from year to year, please check with your tax or legal advisor, ** IRC Section 2042 (2)

Posted in:Personal Tax ArticlesThis article was written by TaxBizPro, LLC 2023, all rights reserved ©.  

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