Estate Planning Can Help Reduce Taxes
Your estate, which consists of all the property that you leave behind when you pass away, may be subject to several types of tax. These “death taxes” can apply at the federal and/or state levels. Commonly discussed taxes include estate taxes, which are taken out of your estate, and inheritance taxes, which are paid by the people who receive assets from your will.
Estate taxes exist at the federal level and in several states. This type of tax is calculated from the estate’s net value. Currently the federal estate tax only applies to estates valued at more than $11,700,000, so this tax will not apply for many people. Inheritance taxes are required in very few states, and not at the federal level. In the states in which an inheritance tax applies, there are typically exemptions for close relatives. With the right estate plan, you can reduce these taxes.
One way to ease your tax burden is to transfer assets, whether financial assets or real estate, out of your estate before you die. Trusts are a popular way to transfer assets in a carefully controlled manner. There are several different types of trusts with different purposes. For example, an irrevocable trust can bypass estate taxes, whereas a revocable trust is subject to estate taxes but is not subject to the probate process. Another advantage is that assets that you put in a trust usually cannot be reached by creditors.