Most people in California don't have to be concerned about estate taxes when they prepare an estate plan. The federal estate tax only applies to estates that are worth more than $5,490,000. Married couples can effectively combine their estate tax exemptions, meaning that up to almost $11 million of their combined estates can be shielded from estate taxes. At the state level, California has eliminated its estate and inheritance taxes.
For those whose estates are above, or approaching, the federal exemption amount, tax planning is a critical part of the estate planning process. Fortunately, there are a number of strategies to reduce one's potential estate tax liability.
A trust is one of the most effective strategies to reduce estate tax liability. Assets placed in a trust can reduce the size of one's taxable estate. There are a number of different types of trusts that can be used for estate tax planning. For example, a qualified personal residence trust can be used to keep real estate out of the taxable estate. A credit shelter trust can be effective for a surviving spouse after the first spouse has passed away.
Other strategies to eliminate unnecessary taxation include lifetime gifts to reduce the value of one's estate; transferring appreciating assets during one's lifetime, before their value increases over the exemption amount, and setting up an irrevocable life insurance trust to cover the cost of estate taxes. Choosing the right strategy, or combination of strategies, will depend on the individual client's financial situation, family circumstances and personal wishes.
Source: usnews.com, "5 Smart Strategies to Reduce Estate Taxes," Maryalene LaPonsie, accessed Feb. 23, 2017.