How To Avoid Inheritance Tax

Tips for avoiding inheritance tax

The United States and Canada have widely differing inheritance tax laws. In Canada, estate taxes were repealed in 1972, and in the United States, the amount of tax the beneficiaries of an estate have to pay depend on the value of the estate. In 2010, American estate tax laws were frozen for a year, but were reinstated in 2011. Though the specific rules are very complex, the easiest way to understand how to avoid inheritance tax in the United States is to ensure the value of the estate falls beneath the minimum guidelines.

Inheritance Tax Laws in the United States

Keep in mind that as of the time of research, federal inheritance tax laws in the United States were undergoing a period of change. You should review current laws to ensure that you are acting on up-to-date information. Consulting a tax lawyer is also strongly recommended if you are planning your will or are in line to receive an inheritance in the United States.

The inheritance tax rate in the United States is nil if the value of the estate is less than $1 million. Thus, avoiding inheritance tax means keeping the value of the estate beneath that ceiling. Taxes are calculated on the full value of the estate, not the value of the money received by each beneficiary. Thus, an estate worth $1.2 million split equally between three people would be taxed, even though each party is only receiving $400,000 worth of assets. The inheritance tax rate can be as high as 55 percent, depending on the amount of money involved, so it pays to know how to avoid inheritance tax as it can put tens of thousands of dollars back into the pockets of your heirs.

If you're planning your estate, there are a few ways to avoid inheritance taxes if you anticipate a value in excess of $1 million. First, you can create an irrevocable trust. This means that you are giving assets away and cannot get them back. The trust can benefit your heirs, just as your estate would, except that you shield the assets from taxation. You can also give tax-free gifts of as much as $13,000 per year, so this is another strategy you can use to bring the value of your estate below $1 million. Finally, you can also talk to a lawyer about setting up a family corporation or limited partnership. These organizations can be used to shield inheritance monies from taxation.

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