Estate planning is not only planning the distribution of your property when you pass away, but planning to make the most of deductions and exemptions for estate taxes. We discuss three deductions that reduce federal estate taxes.
1. Unlimited Marital Deduction
The unlimited marital deduction allows a spouse to pass unlimited property to the surviving spouse with no limit to the value of the property. There is a drawback to using this as the sole method of reducing estate taxes, as it could increase the tax burden of the surviving spouse’s estate, creating a tax issue for the heirs. It is also noteworthy that the unlimited marital deduction does not apply if the surviving spouse is not a U.S. citizen, even if the spouse is a legal resident.
2. Charitable Deductions
Property left to a qualified, tax-exempt organization is also exempt from estate taxes, and estate planning tools include charitable bequests and charitable remainder trusts to take advantage of this deduction while honoring an institution or cause that you find worthy.
3. Personal Exemption
The Federal threshold for estate taxes has been in the news in 2010, as a 2001 law technically repealed the Federal estate tax in 2010. In 2011, the Federal estate tax returns, and the property exempted from Federal estate taxes will be just $1 million. Considering the property subject to the estate tax includes real estate, 401K accounts, stocks and bonds and personal property, it doesn’t take much to reach this threshold within an average family.
While these deductions and exemptions reduce the estate tax burden of an estate, it’s best not to rely on them to ensure there is no tax obligation. You should plan proactively to deal with estate taxes, and work with an estate planning attorney to build a comprehensive estate plan to not only deal with estate taxes, but ensure your goals are met.