Estate Tax-Saving Tips for the Average Taxpayer

The average taxpayer has many options when it come to lowing his or her estate tax. Though the current $5 million estate tax exemption may seem beyond the average taxpayer’s pocketbook, the exemption is set to decrease to $1 million unless Congress acts. The lowered exemption may still seem rather high, but after adding in the home, car, retirement accounts, etc., it is not unlikely that the average taxpayer’s assets will surpass the $1 million mark. A few tips on how the average taxpayer can maximize tax-saving wealth transfer strategies are below:

• Taxpayers can give $13,000 per year to as many individuals as they wish, tax-free. So one way to make large, tax-savvy gifts is to pass assets through piecemeal gifting—each spouse makes a $13,000 gift, equaling $26,000 total.
• Taxpayers can also make intra-family loans which allow assets to appreciate in a family member’s name without the donor making an outright gift. However, the family member must pay the loan back with interest after a specified period.
• Trusts are another option taxpayers can utilize when gift-giving. A grantor retained annuity trust allows the taxpayer to set up a trust using his or her assets for a specified time (typically,  between three and 10 years). During the trust’s term, it pays the taxpayer an annuity; after the trust’s term, the remaining assets go to the trust beneficiaries.
• Taxpayers also have the option of transferring ownership of their homes to their children now to minimize estate taxes later. With the depressed housing market, now may be the perfect time to transfer a home and cut down future estate taxes.
• A qualified personal residence trusts is yet another method taxpayers can use to minimize estate taxes. Taxpayers specify a term under which they manage and live in their home. At the end of the term, the home transfers to the beneficiaries and the taxpayer can pay rent to the beneficiaries to continue living in the home.

See Karen Hube,  How to Minimize Estate Taxes, Even if You’re Not Rich, Washington Post, Oct. 14, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.