While Benjamin Franklin was referring to the newly created U.S. Constitution when he said “…nothing is certain in life except death and taxes,” he accidentally and neatly summed up the practice of judicious estate planning.
Only 33% of people have arranged their wills. If you are part of the other 67%, you should contact an attorney to get that process started. While you’re at it, there are several options to reduce the taxes owed by your heirs after you pass away.
Buy life insurance to pay the taxes
This won’t eliminate the taxes owed by your beneficiaries, but it will help pay those taxes. Life insurance companies aren’t in the habit of selling policies to people who are deemed too close to the end of their lives, so the earlier you purchase life insurance, the better.
Establish residency in a state without estate taxes
This is easier said than done, but 17 states and the District of Columbia have estate or inheritance taxes. These taxes are mainly levied on large estates and inheritance sums, like in the millions of dollars, but some states will tax any amount.
The good news is Indiana currently has no estate or inheritance taxes, so if you or older loved ones don’t live here, consider establishing residency.
Give money away while you are alive
This may be the easiest way to dodge the tax man. You can give up to $15,000 per person (or per charity) per year without either party paying taxes on it. To be clear, that’s $15,000 per donor. So, married couples can give away up to $30,000 to each child, grandchild or other entity every year while they are both alive.
Set up a trust
An irrevocable life insurance trust is another way to set funds aside until after your death. However, this option is usually for wealthy people.
Many trust companies and banks offer this service, but you can also establish your spouse or one of your children as the trustee – the person or entity that oversees the trust, pays the premiums and distributes the funds after your death.
Set up a donor advised fund
The money you put into a donor advised fund is a tax-free investment account that is donated to charities of your choosing when you pass away.
A family limited partnership or foundation
Again, this is normally for larger sums of money, but you can use this arrangement to reduce taxes for your “limited partners” (your heirs), while protecting that money from possible creditors or divorced spouses who may reappear.
It bears repeating, if you haven’t prepared a will yet, make it a priority. Without a will, distribution of your estate becomes more complicated and time consuming. Consult an attorney if you have any questions.