- Lifetime gifts are a way to reduce the size of your taxable estate while you are living, thus lowering the amount of tax due after your death. As of 2009, each person can make annual tax-free gifts of $13,000 ($26,000 for married couples) to any number of their future intended beneficiaries. Although any amount over this limit is subject to a gift tax and has to be reported on IRS Form 709, you won't have to pay any gift tax until the cumulative amount of any such taxable gifts exceeds a lifetime gift tax exemption of $1 million.
- An irrevocable life insurance trust is another way a person can reduce the size of his estate. In such a trust, ownership of a life insurance policy is transferred to the trust, and the death benefits paid to the trust will not be included in the estate of the deceased, and thus be exempt from estate tax. It is important to note, however, that once transferred, all control over the policy is lost, which means that it cannot be canceled and the beneficiary cannot be changed. This could prove to be particularly troublesome in the case of a future divorce or family conflict, and as such, is not a decision to be made lightly. Further, such transfers made within three years of death will be disallowed by the IRS, and any proceeds will be included in the estate of the deceased, just as it would have been under the original policy.
- Also known as exemption trusts and marital life estate trusts, AB trusts are one of the most popular ways for married couples to ensure that their property ends up in the hands of their children without being subject to estate taxes. In an AB trust, the spouses' joint property is put into a trust, and when one spouse dies, their half of the property is turned over to the children with the understanding that the surviving spouse still has the right to use it, and be entitled to any income generated from it, for the rest of their life. This effectively cuts the surviving spouse's taxable estate in half. When the surviving spouse dies, the remaining property then goes to the children, greatly reducing the likelihood of estate taxes.
- Any money that you pay for tuition to an educational institution on someone's behalf won't be subject to gift or estate tax. Although this has to be used for tuition and wouldn't be permissible for supplies or college room and board, any tuition money paid is above and beyond the $13,000 annual gift allowance, so in effect you could pay college tuition for a grandchild, and make a $13,000 gift to be used for room and board, without any of the money being subject to estate tax. This is an excellent way of removing wealth from your estate as well as being able to see positive results from your money while you're still alive.
- Estate planning is a complex matter with laws that vary from state to state, and it involves complicated decisions with far-reaching financial and legal consequences. Setting up trusts and legal documents such as wills and powers of attorney are not simple do-it-yourself procedures, so it's advisable to seek the counsel of a qualified attorney in your state of residence.
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