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Estate taxes can put a huge dent in the assets you plan to give your loved ones after you pass. If you do not think ahead, your loved ones may end up only getting a small portion of what you intended them to receive because of estate taxes. This is where estate planning strategies are beneficial.

Thankfully, you can take steps now to minimize your taxes after you pass, allowing your loved ones to get the most out of the legacy that you have left for them.

What Is Estate Tax?

When you pass, your estate assets must generally go through the probate process to be collected and distributed based on your intentions as set out in your will or other estate planning documents. That process has some administrative fees and costs associated with it.

Estate taxes are imposed on top of these probate fees. Although the probate process and estate taxes have some similarities, they are separate activities.

At the simplest level, the federal estate tax is a fee that is imposed on the transfer of your property at the time of your death. It touches all of your property that transfers from your estate to any other person or entity. While you can get certain deductions from your “gross estate” to compute the tax, these deductions are limited.

The federal estate tax rate is high—it can be up to 40% of the gross estate, less deductions. Thankfully, the tax is only imposed if your estate will be above a certain threshold. For 2020, only the value of the estate that is over $11.58 million (called the “estate tax exemption”) will be taxed, and the tax rates are graduated. For married couples, the exemption is up to $23.16 million. However, this higher exemption rate is currently set to only go through 2025. After that, it may be reduced back to its previous level of $5 million per person.

For example, if your estate is worth $12 million after considering all of your deductions, then only $420,000 will be taxed. The rate that applies to these funds in 2020 is $70,800 plus 34% of funds above $250,000. That means that the tax imposed will be roughly $128,600.

State-Level Estate Taxes and Inheritance Taxes

The federal estate tax applies no matter where you live, but many states have done away with the estate tax if you pass away in a specific state. It is sometimes also called “inheritance tax” at the state level, and some states impose both an estate tax and an inheritance tax. States that have this additional tax include:

  • Washington State
  • Washington D.C.
  • Massachusetts
  • Pennsylvania
  • Vermont
  • Rhode Island
  • Connecticut
  • New Jersey
  • Maryland
  • Kentucky
  • Illinois
  • Iowa
  • Minnesota
  • Nebraska

Rates in these states vary a great deal. For example, the estate tax is up to 20% in Washington State, but it can be as low as 0.8% in Illinois.

There are situations where you can be taxed in more than one state if you have homes in both states. Thankfully, Colorado does not have state-level estate or inheritance taxes. However, if you maintain a home in a state that has an estate tax, you run the risk of having your estate taxed in that state. Having proper estate planning strategies to reduce estate taxes can help you avoid this unfortunate situation.

Most, if not all, of the strategies to minimize your federal estate taxes will also help you deal with state-level estate and inheritance taxes too.

How Can I Minimize or Avoid Estate Taxes?

You can take steps to minimize your estate taxes now, long before your estate goes through probate. Strategic planning by using a combination of trusts, tactical account creation, and maintenance, giving tactics, and additional tips will help you decrease the overall tax that your loved ones will have to pay out of your estate.

Create a Will

You may not immediately think of this simple estate planning tool when you start thinking about how to minimize estate taxes. However, when used properly, a will can be the “jumping-off point” to assist with effective estate planning to decrease or avoid estate taxes altogether.

Many of the following tips and suggestions are either incorporated within a strategically designed will or used in combination with a will.

Take Full Advantage of Exemptions and Exclusions

Portability and the Marital Deduction

All property that passes to your spouse on your death is completely free of estate tax obligations. As a result, individuals have a huge incentive to pass their assets on to their spouses at their death.

The tricky situation occurs when the second spouse passes away. Of course, they cannot use the same exemption. Instead, they can actually use any unused portion of the exemption. This concept is referred to as “portability.”

If someone passes, but they did not use their full exemption ($11.58 million as of 2020), then that exemption carries over to the surviving spouse. If the deceased spouse makes a portability election, then his surviving spouse can not only use his or her exemption, but they can take full advantage of their deceased partner’s exemption, too.

Gifting Effectively

One of the most effective ways to save on the estate tax is to decrease your estate’s overall value. Gift-giving can be a great way to do that. However, you need to be wary of the gift tax as part of your gift-giving.

The gift tax is imposed on any gift to a single person of $15,000 or more. The donor (the gift-giver) is generally responsible for paying the tax. You can gift this $15,000 amount to any number of people you would like without triggering the gift tax.

There are some general exceptions to the gift tax rules. You can give the following gifts in any amount without having to pay gift tax.

  • Tuition or medical expenses you pay for someone else
  • Gifts to your spouse
  • Gifts to a political organization for its use

The gift tax ranges from 18% to 40%, so finding ways to avoid it is in your best interests.

Other Means to Remove Assets from Your Estate

There are many other ways that you can remove assets from your estate, as well. Simply enjoy the funds that you have can be a great way to decrease your estate value—and don’t feel bad for doing this! By spending the assets now, you are merely avoiding paying those funds to the government instead.

The Role of Life Insurance

Life insurance gives funds to your loved ones in the event of your passing. As a rule, if your beneficiary gets the money directly, they often will not have to pay any taxes on those funds. However, if you make the insurance policy payable to your estate, then it will be added to your gross estate and could be subject to estate taxes.

In addition, your estate may also have to include these funds if you (as the grantor) have any “incidents of ownership” in the policy. Essentially, that means that you need to arrange for someone else to make the payments on your policy to avoid having the benefit amount included in your gross income.

Transferring the life insurance policy is often as simple as calling the insurance company to make an assignment of the policy to someone else. However, that third party must also pay the premiums for the policy, too. Keep in mind that you can give gifts of up to $15,000 per year, so whoever receives the policy assignment could use some of that money to pay for the life insurance premiums.

Utilize Trusts Effectively

You may have heard that a trust can be a good tax and estate planning tool that can help you avoid estate tax—and it is true to a certain extent.

However, you have to have the right type of trust to fit your situation. There is no one-size-fits-all estate planning trust. If you do not find the right fit for your needs, having a trust will not be very helpful at all. Instead, it could do more harm than good. Proper trust and estate planning will help you decrease your estate’s overall tax obligations.

Crummey Trust

The Crummey trust gets its name from Clifford Crummey, who was the first taxpayer that used this technique. Essentially, it is a means to fully utilize the gift tax exclusion but also maintain control over when the gift recipient can have access to the assets or funds.

Generally, parents will use a Crummey trust to provide children with lifetime gifts. The parents will often put the full amount that can be excluded by the gift tax laws ($15,000 in 2020) in a protected fund.

While the IRS normally does not permit gifts to trusts, a Crummey trust is essentially a workaround that is effective for both tax and estate planning. To be considered a gift for the exemption, the gift recipient has to have a “present interest” in the gift. As a result, the recipient must have immediate access to the funds.

To meet this IRS requirement, a Crummey trust will allow the recipient immediate access to the funds in a short window, typically 30 to 60 days. If the funds are not removed during that period, then the funds get moved to the trust account. If the recipient does get the funds right away, they only have access to that contribution, not the previous gifts.

Intentionally Defective Grantor Trust

This type of estate planning trust is purposefully created so that it is “defective.” At the basic level, this trust is created so that, as the grantor, you continue to pay income taxes on the funds in the trust, but the assets in the trust will grow tax-free. Then, when you pass the assets to the beneficiaries, you not only avoid gift taxation limitations, but you also do not have to pay on the assets for estate tax purposes.

Generation-Skipping Trust

A generation-skipping trust is just like it sounds—the trust gives assets to your grandchildren or anyone who is at least 37.5 years younger than you. It bypasses your children so that gift-giving goes straight to the next generation. By doing this, the grantor’s children can avoid the requirement of having to pay estate taxes with the funds that they otherwise would have received. By providing money to individuals likely in lower tax brackets, the overall tax burden decreases.

While these trusts can help you minimize your estate taxes, they may not be able to completely eliminate it. The trust is liable for taxation if the transferred amount exceeds certain limitations. For 2020, that limit is $11.58 million, which is the same as the overall exemption for 2020.

Irrevocable Life Insurance Trust

This type of living trust estate planning method is one of just a few that uses a living trust as part of your estate planning strategy. Just as the name implies, this type of trust in conjunction with a life insurance policy. The life insurance proceeds are the only asset that is owned by the trust. Because this trust is irrevocable, it cannot be rescinded, amended, or modified in any way once it is created.

By putting the life insurance proceeds into a trust, rather than permitting them to go directly to your estate, the life insurance benefits can avoid being taxed as part of the estate. The trust is often created for the specific purpose of using the life insurance funds to pay estate taxes, but not always. You can certainly set up this type of trust however makes sense for your unique trust and estate planning strategy.

What Happens to Other Wealth-Building Assets? Stocks, Bonds, and Retirement Accounts

As a rule, any asset that you have will be included in your gross estate. That includes things like stocks and bonds that are registered to you. As part of the probate process, your executor will take steps to collect these assets and transfer them according to the wishes set out in your will.

Any stock, bond, or other financial instrument that is owned in your name alone will be included in your gross estate calculation. This general rule also applies to retirement accounts, as well. Even though a retirement account has a beneficiary so that it will not go through the probate process, it is still part of your gross estate for purposes of calculating your estate tax.

Anything that is in only your name when you pass is included in the estate tax calculation. If you own the asset jointly with your spouse, for example, then only half of the value is included in the estate calculation.

One of the Most Common Mistakes When Creating Estate and Trust Strategies

One of the most common mistakes you can make is failing to plan effectively. Using a professional’s services can significantly improve your tax and estate planning strategies, which will help your family get the full value of your estate as intended.

At Dechtman Wealth Management, we can help you decide how to minimize estate taxes using one of these various tax and estate planning strategies. We also have a few other tricks up our sleeve that may be perfect for your unique personal and financial situation.

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Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Dechtman Wealth Management, LLC [“DWM”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from DWM. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. DWM is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the DWM’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at

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Jordan Dechtman

A financial services professional for over three decades, Jordan Dechtman’s mission is to help clients live better with more opportunities for fun and family time. Ideally, his goal is to help them achieve their dreams. Jordan brings a unique set of skills and experiences to the industry. His work ethic and drive to improve both himself and those around him have been honed during his 30+ years as a high net-worth private wealth advisor. Jordan holds a BS in Finance from the University of Arizona. Through his memberships in both the Financial Planning Association and the Financial Services Institute, he is dedicated to championing the financial planning process. Based on assets under management, Jordan has consistently been recognized by Securities America as being among the top 1% of over 1900 registered representatives.