When a loved one dies, there are many things to worry about, of planning the funeral to deal with your own emotions. However, as is often the case, money is an important part of life’s calculus when dealing with a recently deceased relative. If they succeed, your family will have to deal with their money, assets and debts. And if they have a large enough estate, you may need to worry about the estate and estate taxes. However, there are things you can do now to limit the amount of money that ends up subject to these taxes so that your family can use more of your wealth to build their own lives. For help with estate taxes or other financial planning issues, consider: working with a financial advisor.
Understanding the Differences Between Inheritance Tax and Inheritance Tax
First of all, make sure you know the difference between the inheritance tax and the inheritance tax. The estate tax, also known as the “death tax,” is money taken by the government from the estate of a recently deceased person before passing it on to their family, friends, and other beneficiaries. There is a federal estate tax, while a number of states also levy their own estate taxes.
The estate tax, on the other hand, is levied on money after it is passed on to an heir. Money can be subject to both estate and inheritance taxes. There is no federal estate tax, but a number of states levy estate taxes.
The rules for these estate taxes vary from state to state. Sometimes the inheritance tax only applies based on the state in which the heir lives, but it can also matter in which state the deceased lived. Even what condition the property, such as a house you inherit, is in can affect the situation.
There are plenty of strategies for lowering both types of taxes. For more information on lowering potential estate taxes, view this article.
Strategies to Avoid Inheritance Tax
If you believe that you will receive an inheritance when a loved one dies, you should first check the laws in both the state in which you live and the state in which they live. If neither levy an estate tax, you should be clear. When your loved one dies, you have nothing to worry about. There may be an estate tax to deal with, but you don’t pay anything on the money you actually receive.
However, if you have to consider estate taxes, there are some things you can do to lower your tax burden. Keep in mind that some of these steps need to be pre-planned and worked with the person leaving the inheritance. So if you think you might be getting an inheritance, think ahead and talk to your relative about the most efficient way to transfer money.
Arrange to receive the money as a gift
If you receive an inheritance from a relative who is aging, consider talking to them about getting some of it as a gift before they pass away. Currently, the annual gift tax limit is $15,000, so a person can give up to $15,000 to one person each year with no tax consequences.
Let’s say your grandmother told you that she will leave you $45,000 in her will. If, instead of wanting to give you this money, she gave you $15,000 a year for three years before she passed, the money wouldn’t be subject to inheritance tax. Besides, you could invest it in stocks or index funds and end up with more money by the time she actually dies. If it makes your family member feel better, you can even promise not to touch the money until it’s gone.
Use an alternative valuation date
Not all inheritances are cash, as many people receive real estate, including houses and other real estate. In general, the value of the property used for estate taxes is the date of death. However, if the estate is also subject to inheritance tax, it may be an option to use a later date – usually six months after death. This can result in a lower value of the property and therefore a lower tax burden.
Buy a life insurance policy in the event of death (POD)
If you payable on term life insurance policy, your beneficiaries will not owe any tax on the money they receive upon your death. With this money they can pay any other inheritance or inheritance taxes. Again, this requires some difficult planning ahead of time.
Change your place of residence
This may seem like a drastic step, but for some people it may make sense. Remember that not all states levy estate taxes and there are no federal estate taxes. If you’re in a place in your life where you can move, setting up shop in a state where there are no estate taxes can save you or your beneficiaries a pretty penny.
Inheritance tax is levied on money after it is transferred to an heir. Most states do not have estate taxes and there is no federal estate tax. That said, even if you live in a state where there are inheritance taxes, there are several steps you can take to minimize the portion of your inheritance that is ultimately taken by the state.
While estate planning can lead to difficult conversations, it will ultimately leave your family in a much better position after you pass away. In fact, estate tax planning can be just as important as writing a will or setting up a trust.
Real Estate Planning Tips
If you or a loved one needs help lowering inheritance or inheritance taxes, consider: working with a financial advisor. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches for free to decide which one is best for you. If you are ready to find an advisor who can help you achieve your financial goals, start now.
If you’re getting into estate and retirement planning on your own, it’s a good idea to be fully prepared. SmartAsset has you covered with many free online resources that can help you plan for the future. For example, take a look at our pension calculator.
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