How to Minimize Death Taxes

Spend, Gift, Plan, and Move Your Way to a Lower Death Tax Bill

The United States federal estate tax, which places taxes on the transfer of the estate of a deceased person, was originally repealed in 2010, but was then retroactively reinstated that same year. Also known as an "inheritance task", it allowed for a $5,000,000 exemption in 2010 and 2011, then increased that exemption to $5,120,000 in 2012. On January 1, 2013, the estate tax exemption was slated to drop down to $1,000,000, however on January 2, 2013, President Barack Obama signed the American Taxpayer Relief Act into law, which made permanent changes to the federal estate tax laws.

For Americans with estates that are taxable at the state and/or federal level, the following options may help them reduce their overall estate tax liability:

01
Spend Assets

senior couple with financial planner estate planning
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Spending your assets is a surefire method of reducing the value of your estate and reducing your estate tax liability. However this solution only makes sense for those with enough wealth to ensure that they don't run out of the money they'll need to sustain them throughout the remainder of their lives.

02
Gift Assets

This is an ideal option for those comfortable with the idea of giving away part of their estate while they're still alive. However this approach may not sit well with individuals who fear running out of money for themselves. After all--once you commit to giving your cash away, it may be difficult to reclaim it.

03
Create a Foundational Estate Plan

For married couples, basic AB Trusts or ABC Trusts can significantly reduce or even eliminate both federal and state estate taxes assessed against their estates. Note: Beginning in 2011, the federal estate tax exemption has been made "portable" between married couples, which allows a surviving spouse to use a deceased spouse’s unused estate tax exclusion.

04
Get Married

As mentioned above, beginning in 2011 the federal estate tax exemption has been made "portable" between married couples-- including same-sex married couples. This means that if a spouse dies and his or her federal estate tax exemption isn't entirely needed to avoid estate taxes, the unused portion can be added to the surviving spouse's exemption. This essentially lets married couple pass on up to $10,000,000, free from federal estate taxes. So, if you're in a committed relationship but not legally married, consider tying the not, as a way to minimize estate taxes. 

05
Use Advanced Estate Planning Techniques.

There are many advanced methods of reducing state taxes, that simultaneously let you maintain an income stream for life.

  • Family Limited Liability Company offers both estate tax reduction and asset protection.
  • Married couples can take advantage of annual exclusion gifts and their lifetime gift tax exemptions by creating Spousal Lifetime Access Trusts, or "SLATs," for the benefit of one another.
  • Creating a charitable trust, such as a Charitable Remainder Trust, gives you a charitable income tax deduction when the trust is funded, and it gives your estate a charitable estate tax deduction after you die.
  • A Qualified Personal Residence Trust lets you live in your home for a period of years, then the home will pass to your heirs at a reduced value, for estate and gift tax purposes, after the period ends.​

06
Move to a New State

The following U.S. states, as well as the District of Columbia, collect state estate taxes and/or an inheritance taxes: Connecticut, Delaware, Hawaii, Illinois, Iowa, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Nebraska, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, Tennessee, Vermont or Washington.

Those who are concerned with paying an estate and/or inheritance tax may want to relocate to other states. While this may seem like an extreme measure, it may ultimately save thousands of dollars in death taxes, that will stay in the family, instead of going to the government.

To learn more about state estate taxes, refer to the State Estate Tax and Exemption Chart. To learn more about state inheritance taxes, refer to the State Inheritance Tax Chart.