How to Reduce Tax on a Decedent’s Gross Estate

A rich decedent’s estate taxes can be a considerable amount and can take a big part of the assets left to the beneficiaries. The exempted amount of an estate that can be transferred tax-free differs every year.

For instance, back in 2009, the exemption amounted to $3.5 million; however in 2010, estate taxes will have been erased until 2011, when it reaches the brink of $1 million. It is still debatable where the exemption will lead to, but any individual with a gross estate valued more than the current exemption needs to evaluate their tax reduction options.

Spousal Exemption

The whole amount of the estate is passed to the surviving spouse, with no tax whatsoever. However, if there are children who are to become heirs to the estate upon the spouse’s death, ┬áthen the taxes will just be postponed. This is usually the case for those people who don’t have much assets. For people with bigger estates, spousal transfer is not encouraged when looking at it in the long-term point of view.

Lifetime Gifts

A single individual may give gifts amounting to $12,000 annually ($24,000 per married couple filing jointly) without having to pay for gift tax. This gives the gift giver the chance to see how their gifts were received while they’re still living; and it also decreases their estate’s value. A married couple with a number of children can gradually give away part of their money to decrease the size of their estate until it reaches the point where the value is less than the exemption, which would result to the elimination of virtually all taxes on the estate.

Irrevocable Life Insurance Trusts

Another way to decrease the size of an estate and reduce its tax is through life insurance. In this case, one would have to make regular payments to it, the same way they would do in an insurance premium. This then grows separate from the estate. Not only does life insurance trusts decrease the size of the estate, they are also not as expensive and will eventually lead to life insurance proceeds that are free from tax.

 

How Does Estate Tax Work?

Tax on Inheritance

When an individual dies, his assets is transferred to his beneficiary as stated in his will. The estate tax is the fee that the government collects from this transfer. This transfer is usually from the last surviving parent to his offspring. This is not applicable for married couples since both the husband and wife equally own the estate. There’s also such a thing as a federal gift tax so that taxpayers won’t be able to avoid paying the estate tax by transferring large amounts of their wealth before the death of the estate owner.

Rate Based on Value of the Estate

The tax rate on estates is based on a progressive scale of taxation, with a range of 18% for low value estates up to 45% for estates that are valued over $2 million. An estate’s value is the sum of all its assets, including monetary holdings, real estate and investments, as well as assets which are not directly owned by the benefactor, like life insurance and annuities. At present, there is a flat rate for the estate tax, virtually reducing estate tax to zero for estates valued for less than $2 million. This amount, however, increased to $3.5 million back in 2009.

Other Considerations

According to the federal gift tax code, an amount of up to $12,000 ┬ácan be given to any number of beneficiaries each year. Through this gift allowance, an individual can easily allocate money to his progeny without having to pay the extra taxes, and even cut down his estate’s value below the rate of the estate tax.

The estate tax is considered to be one of the more litigious taxes since it has to deal with money and assets that have already been taxed in the past. Most of the beneficiaries of estates didn’t work for any of the properties that they inherit, and this tax free transfer of wealth only increases the gap between the rich and the middle class. It has even been named as the “death tax” because of all the negative impressions attached to it.