Benjamin Franklin once said that “nothing is certain except death and taxes.” While death certainly is inevitable, paying taxes on death is not. Avoiding or reducing the tax you pay when transferring your estate is one of the key estate planning goals.
You may not own enough to pay estate taxes
The Internal Revenue Service (IRS) has raised the threshold at which you pay the 40% federal estate tax to $11.7 million in 2021. They also announced that they will not take retrospective action on any estates transferred before 2025 should the government reduce the threshold.
In certain circumstances, you and your spouse can add your $11.7 millions together. As a couple, you could pass on $23.4 million to your family without incurring federal estate tax.
How can I reduce taxes if my estate is above the threshold?
If your assets pass the federal estate tax threshold, you need to consider other options. Here are some things to consider:
- Using trusts: By putting money into a trust, you legally remove it from your estate. That means the IRS cannot charge tax on it when it passes to your family.
- Using your gift allowance: Each year, you can gift a certain amount to individuals tax-free. In 2021 the maximum you can give someone tax-free is set at $15,000. Spouses can each give $15,000 to the same person. In other words, between you, you can give $30,000 tax-free to individuals you choose.
Consult our estate planning FAQs page to find out more about preventing your assets from ending up in the hands of the IRS. The sooner you start to take action, the more of your estate you can protect.