A person's estate includes real estate, vehicles, stocks, and retirement funds. The federal estate tax, or the "death tax," applies to estate transfers. New York, Minnesota, and Washington also charge this tax. Estate tax is levied on an individual's assets after death before the beneficiaries receive the estate.

Estates under $12.06 million are exempt from federal estate tax. Tax rates vary from 18% to 40% depending on how much the estate exceeds the exemption threshold. Estate tax states have different exemption thresholds and rates.

Transfer of Assets and Giving of Gifts

Gifting and asset transfer reduce estate taxes. Transferring estate assets reduces taxes, and here's how you can do just that:

Marriage Asset Transfer

Upon death, spouses often transfer assets to avoid estate taxes. U.S. citizens can transfer unlimited assets tax-free to spouses. Spouses not US citizens must pay gift taxes on transfers over $164,000 (as of 2022). However, this exemption is limited. After the surviving spouse dies, the estate, including transferred assets, becomes subject to estate taxes. Marital transfers can delay estate taxes.

Gifts to Family Members

Each year, married couples can gift a certain amount to others, including family members, tax-free. The current annual gift tax exemption is $16,000 per individual. This means a couple can collectively gift up to $32,000 annually without tax implications. By regularly giving, couples can significantly reduce the size of their taxable estate, benefiting their family members while strategically managing estate taxes.

Gifting to Minors

Federal laws enable tax-free gifting to minors up to the yearly exemption limit. The Uniform Gifts to Minors Act (UGMA) allows for gifting cash and securities to minors without needing a formal trust. The Uniform Transfers to Minors Act (UTMA) goes further, permitting the transfer of real property to minors, including real estate, intellectual property, and art.

Charitable Donations

Another way to reduce estate taxes is to donate to 501(c)(3) organizations. Tax deductions apply to these donations. Nonprofit educational, religious, and Red Cross organizations are eligible. Charitable giving is a deliberate way to support causes you care about and maximize estate tax benefits.

Trusts Estate Taxes

Trusts are popular estate tax strategies. A legally binding trust appoints a trustee to distribute assets to beneficiaries. After the individual dies, this trustee distributes the assets according to the trust. The lack of probate court proceedings makes trusts better than wills.

Marital Trusts

Marital trusts come in two forms:

Joint Marital Trusts (A-B Trust)

Joint Marital Trusts, commonly known as A-B Trusts, are unique structures involving two distinct trusts. The first part, Trust A, is crafted for the surviving spouse's benefit. This trust outlines the surviving spouse's rights to the assets.

For example, the spouse may have the right to use the assets for income or reside in a trust-owned property. Importantly, assets transferred into this trust are exempt from estate tax. Trust B becomes operational upon the surviving spouse's death, at which point the assets are initially distributed to the beneficiaries intended by the deceased spouse.

QTIP Trusts

QTIP Trusts are similar to A-B Trusts but have notable differences in access and control. In QTIP Trusts, the surviving spouse's asset access is more restricted than A-B Trusts. This setup can be beneficial when there is a need to manage the transfer tax on real estate, ensuring that the marital trust assets are preserved for future distribution while still providing for the surviving spouse.

Irrevocable Life Insurance Trusts

Irrevocable Life Insurance Trusts are designed specifically to hold life insurance policies. These trusts are particularly useful if your estate is near the state or federal estate tax exemption limits. By placing your life insurance policy into such a trust, you can avoid having the policy's proceeds push your estate over the exemption limit.

Since these trusts are irrevocable, they cannot be altered once established. They serve as a strategic tool in managing transfer tax on real estate, as they effectively remove the life insurance policy from your taxable estate while ensuring the beneficiaries are taken care of.

Qualified Personal Residence Trusts

Qualified Personal Residence Trusts allow a married couple to place their home in a trust for their beneficiaries while still living there for a specified time. This arrangement can be advantageous for real estate transfer tax purposes.

However, if the homeowner passes away before the end of the trust period, the estate tax benefits for the beneficiaries may not materialize. It's a strategic way to handle real estate transfer while still enjoying the property during one's lifetime.

Charitable Trusts

Charitable trusts designate a charity as the beneficiary of the trust assets, ranging from cash to real estate.

Charitable Lead Trusts

The donor's lifetime is the typical duration of a charitable lead trust. A chosen charity receives trust funds during this time. The donor receives tax deductions for trust creation. This strategy helps manage real estate transfer tax by supporting a charity before passing on assets, possibly including real estate, to non-charitable beneficiaries.

Charity Remainder Trusts

Charity Remainder Trusts work oppositely to CLTs. A charitable organization manages these trusts and pays the donor or beneficiary during the donor's lifetime. The charitable organization inherits trust assets, including real estate, after the donor dies. Another good way to handle real estate transfer tax and support charity is this trust.

Family Partnerships for Business and Investments

Families that own businesses or invest together use a Family Limited Partnership (FLP). Typically, a family runs a store, chain of companies, or funds in stocks or real estate. Family Limited Partnerships help family members manage and distribute business assets.

FLPs significantly reduce estate taxes. Family members can transfer assets more easily by forming a Family Limited Partnership (FLP). This transfer is a strategy to lower the value of some family members' estates, benefiting others.

Transferring estate assets to a Family Limited Partnership (FLP) can significantly reduce estate taxes. It is legal for managing family assets and lowering taxes. Estate planning should include using a Family Limited Partnership (FLP) for real estate transfer tax and working it.

Real Estate Valuation for Tax Purposes

You can value your property based on its current use instead of its best use. The actual use of the property can lower its valuation, reducing estate tax liability. Estate planning must account for real estate transfer tax and transfer tax on real estate. Appraising your property for its true purpose can save you a lot on estate taxes. This method is useful for estate administration and real estate transfer tax planning.