How to Reduce or Avoid Estate Taxes Legally (How To)

How to Reduce or Avoid Estate Taxes Legally

1. Maximize the Federal Estate Tax Exemption

• Exemption in 2024: $13.61 million per individual ($27.22 million for married couples using portability).

• If your estate is below this threshold, no federal estate tax is due.

• If above, consider planning strategies to reduce taxable estate value (see below).

2. Gift Assets During Your Lifetime

Annual Gift Tax Exclusion

• You can gift up to $18,000 per recipient per year (2024) without affecting your lifetime estate tax exemption.

• Married couples can give $36,000 per recipient per year tax-free.

• Gifting reduces the size of your taxable estate.

Lifetime Gift Tax Exemption

• If gifts exceed the annual limit, they count toward your lifetime exemption ($13.61 million in 2024).

• Gifts within the exemption avoid estate tax but reduce the amount available for tax-free estate transfers.

Tuition & Medical Expenses (Unlimited Gifts)

• Direct payments to medical providers or educational institutions are not counted toward the gift tax exclusion.

• Example: Paying a grandchild’s tuition directly to the school reduces your estate without using the gift exclusion.

3. Establish Trusts

A. Irrevocable Life Insurance Trust (ILIT)

• Life insurance payouts are subject to estate tax if owned by the deceased.

• Solution: Transfer ownership of the policy to an ILIT—removes proceeds from taxable estate.

B. Grantor Retained Annuity Trust (GRAT)

• Allows assets to grow outside the taxable estate while providing an annuity to the grantor.

• If structured properly, the appreciation of assets can be passed to heirs tax-free.

C. Charitable Remainder Trust (CRT)

• Transfer assets into a charitable trust, receive income for life, then leave remaining assets to charity.

• Offers both income tax deductions and estate tax reduction.

4. Take Advantage of the Marital Deduction & Portability

A. Unlimited Marital Deduction

• Assets transferred to a surviving spouse are completely estate tax-free (if the spouse is a U.S. citizen).

B. Portability of Exemptions for Married Couples

• If one spouse dies without using their full exemption, the surviving spouse can use the unused portion.

• Example: If a spouse only uses $5M of the $13.61M exemption, the surviving spouse can add the remaining $8.61M to their own exemption.

5. Move to a State Without Estate Taxes

• Some states impose estate taxes, even if your estate is below the federal exemption.

• States with no estate tax:
• Florida, Texas, Nevada, Arizona, Alaska, South Dakota, etc.

• Relocating to one of these states can eliminate state-level estate taxes.

6. Donate to Charity

• Charitable donations reduce the taxable estate and can provide income tax deductions during your lifetime.

• Charitable Lead Trust (CLT): Provides a steady income stream to charities while eventually passing assets to heirs tax-free.

7. Transfer Business Ownership Using Discounts

• If you own a business, consider transferring ownership gradually using family limited partnerships (FLPs) or limited liability companies (LLCs).

• Minority interest discounts can reduce the taxable value of business shares transferred to heirs.

8. Spend More or Use Assets Strategically

• If estate taxes are a concern, spending down your assets can reduce the taxable estate.

• Converting assets into tax-free investments (such as Roth IRAs) may also help avoid taxes for heirs.

Conclusion