(The Epoch Times)—The estate tax is a tax on your right to transfer property at the end of your life. It encompasses an accounting of everything you own or have an interest in on the date of your death. If you die in 2025, according to the IRS, and the value of your estate exceeds $13.99 million, it will be subject to an estate tax.
But there are ways to minimize the estate tax that you should be planning before you pass. From trusts to life insurance, you can ensure the federal government, and, in some cases, the state, take less of your hard-earned money.
Difference Between Estate Tax and Inheritance Tax
An estate above a certain dollar amount can be taxed by the federal government. According to U.S. Bank, the federal tax rate ranges from 18 percent to 40 percent.
However, inheritance is not taxed by the federal government. There is an exception.
If you earn money from that inheritance, the money you earn can be taxed. For example, if you inherit one million dollars, you are not taxed on it. But if you deposit it in the bank and it earns five percent, that additional $50,000 will be taxed.
However, some states do levy an inheritance tax. According to the Tax Policy Center, these states include:
- Iowa (phases out to repeal in 2025)
- Kentucky
- Nebraska
- Maryland
- New Jersey
- Pennsylvania
According to the Tax Policy Center, Maryland is the only state with an estate and inheritance tax.
Life Insurance to Pay Estate Taxes
You can establish a trust that will own an insurance policy on your life. You will make payments to the trust, which will be used to pay the premium.
At death, the proceeds are exempt from estate taxes if the trustee adheres to IRS requirements. The proceeds from the life insurance can be used to pay the estate taxes.
Irrevocable Trust Avoids Taxes
Once created, an irrevocable trust can’t be changed or terminated. Establish an irrevocable trust when you do your estate planning. You can make most trusts irrevocable.
This type of trust offers your assets the most protection from creditors and lawsuits. According to the Federal Long Term Care Insurance Program, the assets in an irrevocable trust aren’t considered personal property.
Because they’re not personal property, the assets aren’t included when the IRS values your estate to determine if taxes are owed.
These assets are also protected from creditors if you file for bankruptcy.
Charitable Trust Avoids Taxes
A charitable trust allows you to donate money in a tax-efficient way. A charitable trust acts like an irrevocable trust. That means that charitable trust assets aren’t considered personal assets and, therefore, aren’t susceptible to estate taxes.
There are two types of charitable trusts.
Charitable Lead Trusts
Charitable lead trusts let you put aside specific assets for one or more organizations. You then distribute the rest of your property to your other beneficiaries. Charitable lead trusts are irrevocable, so you can’t change them once you have put them in place. While not completely tax-exempt, they can significantly reduce estate taxes.
Charitable Remainder Trust
A charitable remainder trust (CRT) is an irrevocable trust you can use as an income source until your death. You place your assets into the CRT.
The assets in the CRT continue to be a source of income, but when you die, the remaining assets in the CRT are distributed to one or more charitable organizations.
Gifting Money Before Dying
You could gift assets to your beneficiaries before you die.
According to the IRS, the annual gift tax exclusion for 2025 is $19,000. This increased from $18,000 in 2024. Married couples can use gift-splitting to give up to $38,000 without the gift being considered taxable.
Remember that any amount you give over the annual limit is subtracted from the lifetime gift tax exclusion. For 2025, according to Morgan Lewis, the lifetime gift tax exclusion is $13.99 million or $27.98 million for married couples.
Fund a 529 or Custodial Account
If you have children or grandchildren, funding an education account for them could reduce your estate.
Contribution limits for 529s are set by states. But you can contribute up to $19,000 annually to them without triggering the gift tax, according to Fidelity Investments.
Do States Have Estate Taxes?
Twelve states collect estate taxes. These include, along with their top tax rate:
- Maryland – 16%
- Vermont – 16%
- New York – 16%
- Massachusetts – 16%
- Connecticut – 12%
- Rhode Island – 16%
- Washington – 20%
- Oregon – 16%
- Minnesota – 16%
- Illinois – 16%
- Hawaii – 20%
- Maine – 12%
The District of Columbia also collects estate taxes. Their top rate is 16 percent.
Minimizing Estate Taxes
The best course of action is to lay out a plan. That starts with knowing the estate tax rules of the state where you live. Know your options.
Determine what income you’ll need to live on, and then meet with an estate attorney to develop a plan.
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