How to Reduce Inheritance Tax

 

Last week, I mentioned a few tips about how to hold title (own real estate) in ways that help your heirs avoid the hassle and expense of probate after you pass away. In case you were not aware, without good planning, a significant portion of your estate can end up in state coffers instead of being handed to your surviving spouse and/or children.

Before I go on, in columns like these I always feel the need to remind folks to seek the advice of their legal and tax advisor when making estate-planning decisions. While I know something about real estate and investing, I know nothing about your financial and legal situations. My columns are intended to be food for thought, not a blueprint for what to go out and do.

Okay, that said, the only downside to estate planning is that you’ll have to spend time, effort, money and emotional expense to prepare for something you want to postpone and for which you will not be present to enjoy the benefits. It’s tough to spend money to save money you’ll be too dead to take advantage of. However, it is important and most of us want to see the fruits of our efforts go to people we love rather than the tax collector.

With that in mind, here are several actions to consider (in addition to holding title on your real estate in a way that automatically transfers ownership to your heirs).

  1. Create a detailed will that names your loved ones as the beneficiaries of your estate.
  2. Give your money away to loved ones before you die. Tax law allows you to give $14,000 per individual untaxed each year. So if you have two grown children and they are married and have two children each, here’s how you can pass on a significant sum without paying any inheritance tax. You can give $14,000 to each child and another $14,000 to each son- or daughter-in-law, and another $14,000 to each of their children. Your spouse can do the same. So, in a single year, you and your spouse can provide $112,000 to each family tax-free. Clearly, you should only give what you can afford, but as they say, “You can’t take it with you.”
  3. If you have no family to whom you care to pass on your wealth, you should still create a will. Simply choose your favorite charities and bequeath your estate to them. I guarantee they’ll appreciate it, and if you choose well, they can put that money to good use and provide you with a legacy long after you’re gone.
  4. You can also give assets other than money. For example, if you give stocks to your grandchildren to help them pay for college, they can sell the stocks (once they turn 24 years old) and pay capital gains tax at their tax rate instead of you selling the stock and paying capital gains tax at your higher tax rate. They could then use the proceeds to pay off their student loans. Or, if you own real estate free and clear, you could sell the property to your son or daughter for $200,000. Then you could forgive $14,000 of the note each year or more depending on how many people are involved in this transfer. This allows you to transfer the whole property without having to deal with the inheritance tax issue.

Basically, I recommend you do not ignore estate planning. Schedule an appointment today with your attorney or accountant and let them know you want to aggressively avoid unnecessary taxes. I’m confident you’ll be glad you did.

If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or visit www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 40 years.