Inheritance tax is often called a voluntary tax. Do the rich lose all their money when somebody in the family dies? Of course not! Why should you lose a dime?
How to Avoid Paying Inheritance Tax
It’s easy to know how to avoid inheritance tax. The terms inheritance tax and estate tax are usually used interchangeably by people, but there is a technical difference. Estate taxes are taxes assessed against the estate of a person who dies. Inheritance taxes are taxes assessed against a person who gets property form a deceased person. The Federal Government imposes an estate tax based upon the net value of the estate. So the term “estate tax” is usually associated with the IRS.
A handful of states assess an inheritance tax on state residents who inherit property. So the term “inheritance tax” is usually associated with states.
Let’s not split hairs and just say that you and your family wants to avoid inheritance tax/estate tax –tax when somebody dies — in whatever form it takes. In this article, we’ll just call it inheritance taxes, no matter what form the tax takes.
Ways to Avoid Inheritance Tax
First you need to determine whether or not your really need to worry about inheritance tax avoiding. Congress sets estate values (exemption equivalent values) where the inheritance taxes kick in. If you are below a specific amount then you don’t have to worry about estate taxes/inheritance taxes.
You need to check each year to see what the “exemption equivalent” amount is. Below that amount the estate is exempt from death taxes, and you don’t have to do anything to avoid inheritance tax problems.
Assuming you have an estate valued above the exemption equivalent amount, you can probably avoid inheritance taxes using a split living revocable trust. The trust needs to create a “shelter trust” (also called a family trust or a B Trust) and a “marital trust” when the first spouse to die actually dies. My book, Protecting Your Financial Future, goes into the inheritance tax avoidance using the living revocable trust in great detail. (Don’t worry it’s a great read. If you don’t agree, just ask for your money back.)
By using the “split living revocable trust” a married couple can pass twice as much estate value to their heirs and just avoid inheritance tax problems. Depending upon what the exemption equivalent is in the year of death, a family should be able to pass several million dollars without any estate tax going to Uncle Sam.
If you have an estate beyond what the split living revocable trust can manage (in respect to avoiding inheritance tax), then you need to use other legal tools to get your estate value down. The $19.99 value DVD, Using Law to Make Money and Protect Your Assets, is an overview of the tools you need to control inheritance taxes.
The legal tools include irrevocable trusts (particularly the Irrevocable Life Insurance Trust, aka, ILIT), family limited partnerships, LLCs and corporations, plus lots of others. Whatever you can do is worth a lot of money, because the federal tax kicks in at 45% and goes up. That’s ugly.