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  • Writer's pictureSamuel Rad

How to Leave a Big Inheritance with Minimal Taxes

Minimizing taxes is one of the most important aspects of a wealthy individual’s financial planning strategy. After all, when you’re earning more than the average person, you’ll also be paying out a lot more to the government, which can set you back in your financial goals.

This strategy should not only cover you while you’re alive but also cover your inheritance once you pass away. Before you die, you should make sure you’ve organized your assets in ways that minimize the taxes your heirs will pay to collect their hefty inheritance.

How to avoid high taxes on your heir’s inheritance

While you might assume that once you die, you can pass your wealth off to your loved ones right away, this isn’t usually how it works. Unfortunately, very large sums of money and valuable assets are subject to estate tax before the inheritance is passed along.

Federal estate taxes require your estate to pay taxes if the taxable value of your assets exceeds a certain threshold. For 2019, the estate tax exemption for individuals is capped at $11.4 million—which means that if your estate is valued higher than that, you’ll owe estate taxes.

Although most American estates won’t meet that threshold, wealthy ones may, and will thus be subject to paying extraordinary sums in taxes. This reduces the legacy you worked to build and leaves less money for your heirs to enjoy.

How to avoid high taxes on your heir’s inheritance

Although there are very few ways to pass along large inheritances without paying any taxes, there are a few ways you can strategically shelter your assets from estate tax so your heirs can enjoy larger inheritances from you without the headache.

Establish trusts: Setting up trusts and placing valuable assets in them is another way to easily pass along assets without the hefty taxes. Assets held in irrevocable trusts are not counted toward your estate, which allows you to funnel assets to your heirs while lowering your estate’s tax burden. There are many kinds of trusts you can use, such as a Grantor Retained Annuity Trust (GRAT), to maximize the appreciating value of assets while giving them to heirs tax-free.

Put life insurance into a trust: Another popular way to utilize trusts is to place your life insurance policy into an irrevocable trust. This way, your life insurance death benefit will not be included in your estate, instead of being transferred to the beneficiary sans-taxes.

Give gifts before you die: There is no rule that says your inheritance must be given after you die. In fact, many wealthy retirees are beginning to give away more of their assets prior to passing away to help out heirs in need and share in the gift-giving while alive. This is also an excellent strategy to avoid estate taxes. By law, you are allowed to give an individual up to $15,000 per year without paying gift or estate taxes. You can give gifts up to this amount to an unlimited number of people each year, so gifting your assets to your heirs while you’re alive is an easy way to avoid tax while also depleting your estate’s worth so it is taxed less later.

Work with a financial planner: A professional financial planner will be able to examine your estate, create a plan, and help you implement strategies to shield even more of your inheritance from taxes upon your death.

If your estate is in danger of owing hefty taxes, contact the best financial planner in Los Angeles today to discuss your options and make sure your heirs are set up for the best future possible.

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