How to minimize your estate taxes

Estate Planning Many people think that estate planning is only for the wealthy — for those with rolling lawns and, well, estates — but this couldn’t be further from the truth. In fact, everyone could stand to think about their estate plan, both for family and financial planning reasons.

However, the tax issue is especially important. While estate tax exemptions are generous now (for 2016, each individual can leave $5.45 million to heirs, tax free), the laws have seen numerous changes over the years. Back in 2008 the exemption was $2 million, and in 2001 it was just $675,000. In other words, you never know what the future might hold.

Rather than leaving estate taxes entirely to chance, take the time now to protect your loved ones from potential regulatory changes in the future. That way, you can walk into retirement with less stress and with the knowledge that you’ve done all you can to secure your family’s financial future.

The best part is that it’s relatively easy to do. It’s advisable to speak to a qualified professional before making changes to your estate plan, and there are two major courses of action you should ask about: setting up trusts and giving gifts in your lifetime.

Setting up trusts

First, you might be asking — what qualifies as a taxable estate? Your taxable estate includes all the assets you might want to transfer to others: your home, bank accounts, retirement and other accounts with a designated beneficiary, and revocable trust assets. Even life insurance, which generates a tax-free payment to your beneficiary in the event of your death, is considered part of your taxable estate.

A simple family trust or bypass is the most basic form of trust planning and is usually a must-have regardless of your asset base. These trusts are generally funded up to the estate tax limit and are passed on to a beneficiary, usually a spouse. The great thing with bypass trusts is that their assets aren’t included as part of the survivor’s estate, so they effectively “bypass” the estate tax at his or her death.

This can be sufficient for families with lower asset levels and uncomplicated wishes about passing on wealth. However, if your situation is any more complicated — for example, if you have children from a previous marriage, if you’d like to designate other beneficiaries, or if you’d like to reduce the size of your taxable estate to the extent possible — you might want to explore a few other options.

Trusts can be used to reduce your taxable estate, and two areas where this is quite effective is with your life insurance policy and your house.

An irrevocable life insurance trust transfers the ownership of your life insurance policy to a separately designated trust. This removes the policy from your estate. Similarly, a qualified personal residence trust (a QPRT) transfers the title of your home into a specialized trust while still ensuring that you have the legal right to remain a resident. You can set the trust up to transfer ownership in, for example, 10 or 20 years, and this agreement removes your home from your taxable estate. After that, any “rent” that you pay on the house also acts as a tax-free transfer of wealth to your heirs.

What if you or your spouse have children from a previous marriage?

QTIP Trust

Navigating the separate concerns of wanting to care for a surviving spouse while also ensuring that wealth is passed to the next generation can feel rather complicated. However, with a qualified terminable property trust (also called a QTIP trust), you can do just that. A QTIP trust can be used to name the surviving spouse as the first and only “life beneficiary.” This means the survivor has access to income and the use of any property for the remainder of his or her life. After he or she passes away, the trust assets go to the final beneficiaries.


Just like rent payments on a house owned in a QPRT act as tax-free transfers to your heirs, you can also reduce estate taxes through gifts, loans, and qualified payments. These strategies don’t work for everyone, as they involve an immediate and direct transfer of assets to someone else. However, if you are looking to put your money to work now, they can be quite useful.

The gift tax limit changes each year, but in 2016 the gift exemption is $14,000 to any one person. Spouses can contribute separate gifts for a total of $28,000. In other words, every year you can transfer this much cash to your children or other heir tax-free.

With interest rates so low, you could also consider structuring a gift as a loan. There are, of course, risks involved, so it is prudent to tread wisely. However, this can be a smart strategy for some.

The IRS requires that personal loans are paid back with interest, and the minimum rate allowed is set according to overall interest rates. This means that you could “loan” your child or other beneficiary a lump sum, help them invest it wisely, and require it to be paid back at the IRS-mandated rate later on. If you believe that the rate of return will be higher than the mandated interest rate, you could help your child to accumulate significant capital gains without triggering the gift tax.

Finally, you can help your family members by making payments on their behalf for medical and qualified education expenses. If you make the payments directly to the institution, they won’t trigger any taxes. However, direct payments for tuition can impact a student’s eligibility for financial aid, so be sure to plan accordingly.

Make a plan

All in all, while the estate tax isn’t a major concern for most Americans today, it’s important to remember that the laws have changed significantly over the years — and there’s no reason to think that they won’t change again. Planning for your estate can not only help you to clarify and consider some important issues with respect to your family, it can help shield your heirs from unnecessary tax burdens in the future.

And that is financial planning at its best.

United Planners does not provide tax or legal advice