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Reducing Estate Taxes Through Comprehensive Estate Planning

Although state estate taxes vary, estates under $5.25 million are currently exempt from paying federal estate taxes. Reducing the taxable estate to be under this threshold amount is one of the main objectives of estate planning, and there are many strategies an estate lawyer can use to help you achieve this.

An important tool for reducing the size of an estate is a trust, which operates differently than a will. When creating a trust, a grantor places assets in the trust and appoints a trustee to manage the assets in accordance with a trust agreement. The assets in the trust can be almost anything, from money to real property. Trusts allow assets to be passed quickly in accordance with the terms of the trust, instead of resorting to probate. Trusts are a vital part of tax planning for any income level, and estate and tax planning are crucial for reducing or eliminating the taxes your loved ones pay after your death.

A Forbes wealth strategist suggests gifting one’s residence to a type of trust called an intentionally defective grantor trust (IDGT). This moves a residence, typically a person’s most valuable asset, out of an estate for estate and gift tax purposes. After creating the trust, a person lives in the residence as a tenant. The rent paid can accumulate in the trust and be used for things like upkeep. There are several important things to remember when setting up an IDGT:

  • Have an independent appraisal to determine the fair market value and fair rental value of the residence.
  • When the residence is transferred to the trust, it is considered a gift and subtracted from your lifetime gift exemption.
  • The trustee of the IDGT is responsible for collecting the rent, and paying for the expenses and maintenance of the residence. The rental income does not create a tax liability, as long as the rental payments are consistent with the residence’s fair market rental value.

If you have questions about estate planning, contact an experienced attorney in Washington, D.C. who can provide individualized legal guidance.

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