Following your death, the last thing you want to leave your loved ones with is a bill. Luckily, there are many ways to avoid costing your heirs an arm and a leg in taxes. Read on for several ways in which you can be proactive and limit estate taxes for after you die.
Form a Trust
Forming a trust will allow you to bypass state probate requirements and the related expenses. Do your research beforehand, though. A revocable trust allows the grantor the ability to take assets out of the trust if they so wish, but an irrevocable trust ties up said assets until that person’s death. Do not put your assets into a joint trust with one of your children, as this will increase the child’s taxes; if you do so and hold your assets for a long time, this can mean your child will inherit a significant tax hit following your death.
Create an LLC
Creating an LLC jointly owned by you and your heirs is another option. An LLC would allow you to transfer assets to your heirs while you are still living, protecting those assets from future lawsuits and creditors. You control the LLC, and, when you give ownership interests to your heirs, the value of your taxable estate is decreased. You will be able to control the assets, keep them in your family, and lower your ultimate estate taxes.
An LLC, however, must meet IRS requirements, and your heirs may be required to pay capital gains liability in the future. An LLC is also sometimes a poor way to try and transfer assets to minors. You also have to register an LLC, and that comes with some expense. You will be required to pay fees to register the LLC in your state.
Buy Life Insurance
Buying life insurance can be an inexpensive way to give your heirs something to use to pay estate taxes. There are some errors you need to avoid if you make this decision. Make sure you yourself are not the owner of the policy, however, as that would increase your taxable estate and estate taxes. For the same reasons, do not name your estate as the beneficiary on your life insurance plan. In order to make your life insurance helpful to your heirs, transfer ownership of the plan to a spouse or other person, or transfer the ownership to a trust. If you die within three years of transferring the policy to someone else, it will still end up as part of your estate, so do not wait.
Your heirs do not need to be burdened with the tax on your estate. You can rest easily knowing you have done all you can to ease your passing for those around you by limiting the amount in taxes they will have to pay after you are gone.
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