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How to Minimize Inheritance Tax?

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The percentage of estates that are large enough to become subject to Inheritance Tax (IHT) may be quite low, but it doesn’t mean that it’s something you should just skip over when preparing your will or receiving an inheritance. If you prepare your will, you might want to pass your estate to someone, but paying IHT may reduce the amount of money that ends up in their bank accounts. The good news is that there are a few ways to protect the inheritance (thus the heirs) from taxes.

Some people who want to control what happens to the estate they leave to others decide to start giving their assets away. Others, if they’re on the receiving end and expect an inheritance from a family member, set up a trust to have help with their eventually received assets. You might also research what you should know about inheritance loans to ensure they can manage even without much money of their own.

In the article below, we explore the subject of the inheritance tax and the possible ways to minimize it.

What Is Inheritance Tax?

Inheritance tax is a tax that a person pays when receiving an inheritance. It’s a tax on the value of the assets that the deceased left to their beneficiaries. The rates can vary depending on the size of the inheritance and the inheritor’s relationship to the deceased.

Inheritance tax is imposed by the state. Each state has its own rules, but the general idea is that upon death, any property that’s transferred to beneficiaries other than the spouse is subject to taxation. However, there’s no rule saying that the property has to be transferred directly to them – it can be transferred through a trust or a corporation. What is more, for the tax to apply, a property must be worth more than the exemption amount.

As for 2021, the federal personal estate tax exemption amount is $11.7 million per person or $23.4 million for a married couple (lifted from $11.58 million and $23.16 million, respectively, in 2020). It means that when your estate is valued after you die, any amount higher than the mentioned sum is subjected to federal estate tax. The states that charge inheritance taxes independently from the federal tax include Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.

So how can you minimize the inheritance tax? There are a few ways to go about it.

Give Away Gifts

Giving away gifts during your life is a great way to reduce the future inheritance tax. If you give away your property and money while you’re alive, your estate will be smaller upon your death and might not rise to the point where it will incur the inheritance tax.

Over the course of a year, you can give up to $15,000 per person but to any number of people you want, and these “smaller” gifts won’t be considered taxable. If you’re married, you and your spouse can collectively give away up to $30,000 per person to any desired number of recipients – reporting the gift or paying any taxes won’t be necessary. What it means in practice is that if you and your spouse have two children, you can give away up to $60,000 in gifts each year without any tax implications.

Put Everything Into a Trust

Another way to avoid taxes is to create an irrevocable trust – a type of trust whose terms cannot be modified, amended, or terminated without the permission of the grantor’s beneficiary or beneficiaries. Then, you can transfer the ownership of your property into such trust. This way, you will no longer own the transferred assets, so they won’t be a part of your estate.

After your death, the trust will remain as the “owner” of your assets. However, it’s essential to remember that this works only with an irrevocable trust. Before deciding whether you should create an irrevocable trust or not, try to speak to an experienced legal professional who specializes in the local law of your state.

What if You Don’t Pay the Tax?

In case you don’t transfer or give away your assets while you’re alive, your designated heirs will be the ones required to pay it when they receive the inheritance in the form of the money or property after your death. As such, they will get less than they would if you did something.

You might also be interested in knowing that the IRS does not impose taxes on foreign inheritance or gifts if the recipient is a U.S. citizen or resident alien (someone who is a permanent resident of the country in which they reside but does not have citizenship).

Final Thoughts

Knowing what will happen to your estate after your death is essential, especially if you want to ensure that you make a plan to distribute your assets properly while you’re still alive. Planning in advance will let you reduce or even eliminate estate or inheritance taxes, especially if you want your loved ones to inherit your money or property that you’ve worked for your entire life without the

Medical Device News Magazinehttps://infomeddnews.com
Medical Device News Magazine is a division of PTM Healthcare Marketing, Inc. Pauline T. Mayer is the managing editor.
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