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Tips for reducing your estate tax liability

Mar 1, 2018 | Estate Planning

Estate taxes are on the minds of many who have collected assets throughout the years. While many people may not hit the exemption levels for taxation, it can be surprising how much an estate is worth.

In 2017, $5.49 million worth of assets could be protected against taxes. In 2018, that rose to $5.8 million for individuals. If you’re not sure if you have that much in assets, consider this: These assets could include everything from insurance policies to your favorite boat. If you add up everything you own, it may shock you how much it’s all worth.

How can you find out your estate’s worth?

To value your estate, you need to start by understanding your two main options for the date on which you value your assets. The first is the date of death. The second is an alternative valuation date.

It’s wise to consider an alternative valuation date, which can be any time in the six months following a person’s death if you have assets that could depreciate during that time. On the other hand, if assets only increase in value, consider valuing them as soon as possible on the date of death.

An estate’s value is the total value of its assets and property before debt or taxes are deducted. If you have a property worth $5 million but still owe $3 million, you technically already have $5 million in assets. The debts come out along with assets after the total value of your estate is totaled.

How can you reduce your estate taxes?

If you have over the $5.8 million in assets, you can reduce or eliminate your estate taxes by looking into one of a few options. One is to use both estate tax exemptions if you’re married. Another is to give away or remove assets from your possession before you pass away. Finally, you can purchase insurance, like a life-insurance policy, to replace assets’ value, so you can give away physical assets but retain the assets you want for your beneficiaries.

If you decide to remove assets from your estate to reduce your overall tax liability, be cautious when doing so. You need to do so well before you pass away so that you have time to gift items without being taxed. Every year, the law allows you to give a specific amount in tax-free gifts (it was $13,000 in 2013 and $14,000 in 2017). 

Planning to give away that amount in assets each year before too long helps you reduce your overall estate value and reduce the risk of owing taxes on your estate following your death.

These are a few tips for keeping your estate taxes low. Plan early and ahead to avoid paying too much in taxes.