Assessing Your Assets

You have more assets than you may realize. Your house, cars, retirement savings, life insurance policies, personal possessions, and business interests may add up to a sizeable estate. If your assets exceed the estate tax exemption (currently $1.5 million), estate planning can reduce your inheritance tax.

When most people plan for their death, they think of making a will. Your will distributes your assets among your heirs, but does not protect your estate from taxation. A living trust may provide better protection for your estate.

Organizing your assets is the first step to reducing your inheritance tax. Before you speak to an estate planner or lawyer, make a list of your assets. Everything you own, in whole or in part, is an asset: real estate, insurance policies, a family business, savings accounts, even artworks or collectibles. With a complete list of your assets, your estate planner can help you decide how best to protect them.

Consider both your and your spouse's assets in your estate planning decisions. You can use an A/B (or marital deduction and bypass) trust to reduce your joint inheritance tax liability significantly.

Assets that have appreciated (increased in value) significantly over the years, such as real estate and stock in a growing business, make good charitable donations. Selling or passing on such assets will cost you capital gains tax or inheritance tax on the full current value. Donating these assets to charity provides current tax benefits, avoids giving money to the federal government, and benefits a worthy cause.

You can avoid estate taxes on your life insurance policies. Making one of your heirs the direct beneficiary of your life insurance policy, or making the policy payable to a trust, avoids having that money included in your taxable estate.

An irrevocable trust can help you avoid inheritance tax. This is legally very complicated. Consult a lawyer before attempting to avoid inheritance tax in this way. If you retain any control over the assets in the trust, they will be considered part of your estate, and taxed accordingly.