There are many different ways that you can help prepare yourself and your estate for taxation. In fact, there are some options you can use to minimize or completely remove the risk of taxation in some instances.
Since there are so many options to reduce taxation, you may need to sit down and go over options that are specific to your estate plan with your attorney. Getting to know all your legal options is a good idea, because you may be surprised at how much money you can save by doing so.
What are three ways to prepare for taxes on an estate?
During your estate planning process, you may want to look into a few different trust options such as these below.
A Crummey trust helps overcome issues with passing on up to $15,000 (in 2021) of gifts to your beneficiaries without being taxed. Normally, if you pass on that money or an asset of that value, you can take a gift-tax exclusion. Your beneficiaries would also get the money or assets immediately. If you put the money or assets into a trust, you wouldn’t be able to use the exemption.
With the Crummy trust, you make gifts by placing assets or money into an irrevocable trust. Beneficiaries are able to withdraw from the trust for a short time each year, but if they miss it, the funds remain locked and are only administered based on the terms of the trust.
By doing this, you can take the gift-tax exemption and protect the money or assets against beneficiaries who might otherwise overspend.
Minor trusts work similarly to Crummey trusts and may help you use the annual gift tax exclusion. The trusts don’t pay out until beneficiaries reach the age of 21.
Charitable remainder trusts
Finally, with charitable remainder trusts, heirs are able to get payments during their lifetime for up to 20 years. These trusts are tax exempt and don’t pay income taxes. Your beneficiaries will need to pay tax on any income distributed to them, but since the payouts are spread out, the taxes may be minimized.
These aren’t deep definitions of these trusts, so it is valuable to take time to learn more about them if they may be helpful in your situation.