5 smart strategies to reduce property taxes | Taxes
If you die this year and have more than $ 5.49 million in assets, the federal government could tax the excess up to 40%. Depending on where you live, your state government may also take a stake.
âSome people don’t care about inheritance taxes,â says Erin Durkin, director of financial planning for EP Wealth Advisors. “They think, I’m getting out of here. My kids can pay.”
However, some financial experts say this could be the wrong attitude. Minimizing inheritance taxes is all about ensuring that the money that you have worked hard to earn and save will be used for purposes that are important to you. âAt the end of the day, you’re trying to maximize the estate, not minimize the amount the kids have to pay,â says Ash Toumayants, owner of Strong Tower Associates at State College, Pa.
Here’s how to protect your inheritance and keep your money out of government coffers.
Find out if your estate will be taxed. Property taxes may seem like a problem for the ultra-rich, but even middle-class families can end up with a bill. Bank accounts, investments, real estate, businesses and life insurance are some of the assets added to determine the size of an estate. Even those below $ 5.49 million may be subject to state property taxes, which usually have a lower threshold. âThe surprises come from real estate and businesses,â says Durkin. A few rental or vacation properties can quickly drive up an estate’s value, especially in states like California where real estate is expensive.
If you own a business, its value will also be added to your estate. âBusiness owners are notoriously bad at valuing their business and their net worth,â says Toumayants. In some cases, heirs can find themselves blinded by a large tax bill because the value of the business is much higher than the owner thought. Toumayants says that farming families, in particular, may encounter this problem because of the value of their land.
Start giving away your wealth now. One way to avoid or minimize inheritance taxes is to reduce the value of your estate. “An easy way [to do that] is to give annual gifts to your children, grandchildren or others, “says Andy Schwartz, director of Bleakley Financial Group in Fairfield, New Jersey.” Each individual is allowed to give $ 14,000 per year to as many people as he wishes it. âDonating to charities is another way to donate money and reduce the size of an estate. These donations can also be tax deductible.
Use your exemption early on to appreciate the assets. The government grants each individual a lifetime exemption of $ 5.49 million from inheritance tax. While this exemption is typically requested at the time of a person’s death, Schwartz says it can be used at any time. In some cases, it may make sense to use the exemption to transfer property now to avoid inheritance taxes later.
âLet’s say I have a highly valued asset,â says Schwartz. These could be anything that is expected to increase in value significantly in the coming years, although a company is the most likely candidate for this scenario. “I can use my lifetime exemption now to give it to the kids with the idea that my [current] $ 5.49 million in assets will be worth $ 20 million [when I die]. “By donating the asset while it is at or below the lifetime exemption limit, heirs can avoid a costly tax bill later.
Put your assets in a trust. âThe only real way to avoid taxes is to create trusts,â says Toumayants. Some people balk at the idea because it gives control of their money to someone else, but Toumayants notes that that person may be a family member.
There are several types of trusts available, and a financial planner can help you determine the best way to use a trust to protect assets from estate taxes. Durkin notes that a qualified personal residence trust can exclude real estate from an estate, while Schwartz recommends a credit shelter trust for assets after the death of a partner in a marriage. “The [surviving] his wife has full access to it, but when she dies she is excluded from his estate, âsays Schwartz.
Purchase additional life insurance to cover the cost. Wealthy people who know they can’t entirely avoid inheritance taxes may want to purchase a life insurance policy to foot the bill after they leave. “It does not go through homologation, and it goes directly to the beneficiaries”, explains Toumayants. The key is to set up an irrevocable life insurance trust to purchase the policy. Otherwise, the value of the policy may be added to the estate and drive the tax bill even higher.
It is said that two things are certain in life: death and taxes. If you use these strategies, you won’t escape death, but you might say goodbye to some taxes.