Estate taxes, also known as death taxes, can be a considerable burden for many people. They can be a huge financial burden for those who do not plan and prepare for them. Fortunately, there are some steps you can take to avoid or minimize estate taxes. This article will discuss some of the ways to avoid estate taxes.
Understand Estate Tax Thresholds
The first step to avoiding estate taxes is to understand the thresholds. Estate taxes are imposed on estates that exceed a certain value. This value is known as the exemption threshold. In 2021, the federal exemption threshold is $11.7 million. This means that any estate worth more than $11.7 million will be subject to estate taxes. It’s important to stay informed of any changes to the exemption threshold as it can change from year to year.
Create a Trust
One of the most common ways to avoid estate taxes is to create a trust. This can be a useful tool for avoiding taxes because the trust is a separate legal entity that can hold assets and property on behalf of an individual or family. This means that the assets and property held in the trust are not subject to estate taxes. Furthermore, the trust can be set up to last for several generations, which can help to minimize taxes even further.
Give Away Assets
Another way to avoid estate taxes is to give away assets before death. This can be done through a gift tax. The gift tax allows individuals to give away a certain amount of money or assets before death without having to pay estate taxes. The amount of money or assets that can be given away without having to pay taxes is limited, however, so it is important to be aware of the gift tax threshold. In 2021, the gift tax threshold is $15,000 per person per year.
Use Tax Planning Strategies
Tax planning strategies can also be used to avoid or minimize estate taxes. This can include using deductions, credits, and other tax planning strategies to reduce the amount of taxes owed on an estate. It is important to consult with a financial planner or tax professional to ensure that the right tax planning strategies are used to reduce taxes.
Invest in Tax-Advantaged Accounts
Another way to avoid estate taxes is to invest in tax-advantaged accounts such as a Roth IRA or 401(k). These accounts allow individuals to save and invest money while deferring taxes until the money is withdrawn. This means that the money saved in these accounts is not subject to estate taxes. Furthermore, these accounts can be used as a way to save for retirement, which can help to minimize taxes even further.
Utilize Estate Planning Strategies
Estate planning strategies can also be used to avoid or minimize estate taxes. This can include strategies such as setting up a trust or creating a will. A trust can help to minimize taxes by allowing assets and property to be held in a separate legal entity and to be distributed as desired after death. Additionally, a will can help to ensure that assets and property are distributed according to the wishes of the deceased.
Consult With a Professional
It is important to consult with a professional when considering ways to avoid or minimize estate taxes. A financial planner or tax professional can provide advice and guidance on strategies that can be used to minimize estate taxes. Additionally, a professional can help to ensure that all of the necessary steps are taken to ensure that taxes are minimized and that the desired outcome is achieved.
Conclusion
Estate taxes can be a considerable burden for many people. Fortunately, there are some steps that can be taken to avoid or minimize estate taxes. These steps can include understanding the exemption thresholds, creating a trust, giving away assets, using tax planning strategies, investing in tax-advantaged accounts, and utilizing estate planning strategies. It is important to consult with a professional to ensure that the right steps are taken to minimize estate taxes.