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Estate Taxes
Depending on how much you own, your estate may have to pay estate taxes before your assets can be fully distributed. Estate taxes are different from, and in addition to, probate expenses (which can be avoided with a revocable living trust) and final income taxes (on income you receive in the year you die). Some states also have their own death inheritance taxes.
Federal estate taxes are expensive. And they must be paid in cash, usually within nine months after you die. Since few estates have this kind of cash, assets often have to be liquidated. But estate taxes can be substantially reduced or even eliminated–if you plan ahead.
| Year of Death | Exemption | |
|---|---|---|
| 2009 | $3.5 Million | |
| 2010 | N/A Repealed | |
| 2011 & after | $1 Million |
How can I reduce or eliminate my estate taxes?
In the simplest terms, there are three ways:
- If you are married, use both estate tax exemptions.
- Remove assets from your estate before you die.
- Fund Estate Tax Liability to replace assets given to charity and/or pay any remaining estate taxes.
1. Use Both Exemptions
If your spouse is a U.S. citizen, you can leave him or her an unlimited amount when you die with no estate tax. But this can be a tax trap, because it wastes an exemption. Tax planning in a living trust lets you and your spouse use both your estate tax exemptions and transfer assets to your loved ones.
2. Remove Assets From Your Estate See Estate Asset Strategies 
A great way to reduce estate taxes is to reduce the size of your estate before you die. So, spend some and enjoy it! Also, you probably know whom you want to have your assets after you die. Appreciating assets are usually best to give, because any future appreciation will also be out of your estate.
3. Fund Estate Tax Liability
Depending on your age and health, buying life insurance can be an inexpensive way to replace an asset given to charity and/or to pay any remaining estate taxes. The three-year rule mentioned earlier does not apply to new policies. But you should not be the owner of the policy– that would increase your taxable estate and estate taxes. To keep the death benefits out of your estate, set up an ILIT and have the trustee purchase the policy for you.
