How to Protect Your Assets from the IRS
Hire an attorney., Understand estate taxes., Use all valid tax exemptions., Transfer your unused exemption., Set up a trust., Make annual tax-free gifts., Create a limited liability company (LLC)., Transfer life insurance.
Step-by-Step Guide
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Step 1: Hire an attorney.
When you pass away, your assets will be distributed according to what is called your "estate plan." Your estate plan is a series of documents and creations meant to allow your assets to be distributed according to your wishes and with as little financial burden as possible.
To create an estate plan, hire a qualified trusts and estates attorney to help.
Visit your state bar website and utilize their lawyer referral service if you do not already have a lawyer.
In California, for example, you can call the state bar and talk with someone about your legal issues.
They will assess your needs and get you in touch with qualified attorneys in your area.Before hiring an attorney, ask to sit down for an initial consultation.
Be sure you ask about their experience creating comprehensive estate plans for the purposes of reducing your tax liability.
In addition, make sure you ask about fees. -
Step 2: Understand estate taxes.
Federal estate taxes can cost your estate between 45% and 55% of its total value.
These taxes must usually be paid in cash within nine months of your death.
Any estate with a value of $5.45 million or more will have to pay estate taxes (i.e., the exemption is $5.45 million)., Anything you pass down to your spouse is exempt from estate tax.
While this is a great short-term solution, you may be creating problems for your spouse when they die.
By using this exemption, you are adding to your spouse's estate value, which may increase their tax liability when they pass away.
For example, assume Bob and Sue have an estate value of $10 million and they both die when the exemption is $5 million.
When Bob dies, he can pass everything to Sue and no estate taxes will be due.
But when Sue dies, her estate will equal $10 million and she can only use a $5 million exemption.
The other $5 million will incur estate taxes in the amount of $1.75 million., If you pass away and do not use all of your $5.45 million exemption, you can pass the unused portion to your spouse.
This is called portability.
You can use portability to give your spouse a larger exemption than they would usually have.
For example, assume Will and Sally are married to each other.
Will has $3 million in assets and Sally has $7.5 million in assets.
When Will dies, he uses $3 million of his exemption to shield his assets from estate taxes.
His unused exclusion amount is $2.45 million (if the exemption amount is $5.45 million).
He passes that unused portion to Sally.
When Sally passes away, she will have an exemption amount of $7.9 million.
Because she has $7.5 million in assets, she will be able to distribute her entire estate without having to worry about estate taxes., If you set up certain types of irrevocable trusts, you will be able to remove a large portion of your assets from your estate and avoid estate tax.
An irrevocable trust simply means that once you put the property in trust, you no longer own those assets.
Even if you do not own the assets in the trust, you can still benefit from the trust during your lifetime.
To create a trust, you need to place property in trust for the benefit of one or more beneficiaries.
You do all of this by creating a trust document.
One type of trust is a qualified personal residence trust (QPRT).
When you set up this trust, your home will be removed from your estate but you can continue to live there for a certain period of time.
Usually, the time period is somewhere between two and 20 years.
Once this period is up, the home will be transferred to the trust's beneficiaries., The tax code allows you to make a certain amount of tax-free gifts every year.
If you need to reduce the value of your estate to avoid estate taxes, consider giving annual gifts to others.
In 2016 the annual exclusion amount is $14,000 per donee.
This means you could give each of your children $14,000 every year without being taxed., An LLC is a legal entity recognized in all 50 states.
When you create an LLC, you are creating a business entity that has certain protections and responsibilities.
In a family LLC, you (the parent) will maintain management of the LLC and your children and other family members will hold shares in the LLC's assets.
Once you create the LLC, you can begin transferring whatever assets into the LLC that you want (e.g., cash, property, and personal possessions).
You will then translate the value of those assets into LLC units of value (i.e., stock).
Now you can transfer those units to whoever you want.
The LLC units can be discounted up to 40% when they are transferred to non-managing members.
This is where you can really reduce your tax liability.
For example, if you want to gift one child non-management shares of LLC units that are valued at $1,000 each, you can apply a 40% discount to the value (bringing the value of each unit to $600).
Now, instead of transferring 14 shares before having to pay a gift tax (because the gift tax applies after $14,000), you can transfer 23 shares., If you die and own one or more life insurance policies, the full amount of the proceeds will be included in your taxable estate.
Because some life insurance policies can be for upwards of $500,000, they can put add a substantial amount to your taxable estate.
However, if you do not own the life insurance policies, they will not be included in your estate.
To transfer ownership of your life insurance policies:
Transfer ownership to other people.
Each policy will set out the ways you can transfer ownership.
Look at your policy for details.
When you use this method, the Internal Revenue Service (IRS) will disallow the transfer if you die within three years of making the transfer.
Create an irrevocable life insurance trust.
Once you transfer ownership of your policies to the trust, you are no longer the owner of them and they will not be included in your estate.
Your trust will then distribute the proceeds to any beneficiary you name. -
Step 3: Use all valid tax exemptions.
-
Step 4: Transfer your unused exemption.
-
Step 5: Set up a trust.
-
Step 6: Make annual tax-free gifts.
-
Step 7: Create a limited liability company (LLC).
-
Step 8: Transfer life insurance.
Detailed Guide
When you pass away, your assets will be distributed according to what is called your "estate plan." Your estate plan is a series of documents and creations meant to allow your assets to be distributed according to your wishes and with as little financial burden as possible.
To create an estate plan, hire a qualified trusts and estates attorney to help.
Visit your state bar website and utilize their lawyer referral service if you do not already have a lawyer.
In California, for example, you can call the state bar and talk with someone about your legal issues.
They will assess your needs and get you in touch with qualified attorneys in your area.Before hiring an attorney, ask to sit down for an initial consultation.
Be sure you ask about their experience creating comprehensive estate plans for the purposes of reducing your tax liability.
In addition, make sure you ask about fees.
Federal estate taxes can cost your estate between 45% and 55% of its total value.
These taxes must usually be paid in cash within nine months of your death.
Any estate with a value of $5.45 million or more will have to pay estate taxes (i.e., the exemption is $5.45 million)., Anything you pass down to your spouse is exempt from estate tax.
While this is a great short-term solution, you may be creating problems for your spouse when they die.
By using this exemption, you are adding to your spouse's estate value, which may increase their tax liability when they pass away.
For example, assume Bob and Sue have an estate value of $10 million and they both die when the exemption is $5 million.
When Bob dies, he can pass everything to Sue and no estate taxes will be due.
But when Sue dies, her estate will equal $10 million and she can only use a $5 million exemption.
The other $5 million will incur estate taxes in the amount of $1.75 million., If you pass away and do not use all of your $5.45 million exemption, you can pass the unused portion to your spouse.
This is called portability.
You can use portability to give your spouse a larger exemption than they would usually have.
For example, assume Will and Sally are married to each other.
Will has $3 million in assets and Sally has $7.5 million in assets.
When Will dies, he uses $3 million of his exemption to shield his assets from estate taxes.
His unused exclusion amount is $2.45 million (if the exemption amount is $5.45 million).
He passes that unused portion to Sally.
When Sally passes away, she will have an exemption amount of $7.9 million.
Because she has $7.5 million in assets, she will be able to distribute her entire estate without having to worry about estate taxes., If you set up certain types of irrevocable trusts, you will be able to remove a large portion of your assets from your estate and avoid estate tax.
An irrevocable trust simply means that once you put the property in trust, you no longer own those assets.
Even if you do not own the assets in the trust, you can still benefit from the trust during your lifetime.
To create a trust, you need to place property in trust for the benefit of one or more beneficiaries.
You do all of this by creating a trust document.
One type of trust is a qualified personal residence trust (QPRT).
When you set up this trust, your home will be removed from your estate but you can continue to live there for a certain period of time.
Usually, the time period is somewhere between two and 20 years.
Once this period is up, the home will be transferred to the trust's beneficiaries., The tax code allows you to make a certain amount of tax-free gifts every year.
If you need to reduce the value of your estate to avoid estate taxes, consider giving annual gifts to others.
In 2016 the annual exclusion amount is $14,000 per donee.
This means you could give each of your children $14,000 every year without being taxed., An LLC is a legal entity recognized in all 50 states.
When you create an LLC, you are creating a business entity that has certain protections and responsibilities.
In a family LLC, you (the parent) will maintain management of the LLC and your children and other family members will hold shares in the LLC's assets.
Once you create the LLC, you can begin transferring whatever assets into the LLC that you want (e.g., cash, property, and personal possessions).
You will then translate the value of those assets into LLC units of value (i.e., stock).
Now you can transfer those units to whoever you want.
The LLC units can be discounted up to 40% when they are transferred to non-managing members.
This is where you can really reduce your tax liability.
For example, if you want to gift one child non-management shares of LLC units that are valued at $1,000 each, you can apply a 40% discount to the value (bringing the value of each unit to $600).
Now, instead of transferring 14 shares before having to pay a gift tax (because the gift tax applies after $14,000), you can transfer 23 shares., If you die and own one or more life insurance policies, the full amount of the proceeds will be included in your taxable estate.
Because some life insurance policies can be for upwards of $500,000, they can put add a substantial amount to your taxable estate.
However, if you do not own the life insurance policies, they will not be included in your estate.
To transfer ownership of your life insurance policies:
Transfer ownership to other people.
Each policy will set out the ways you can transfer ownership.
Look at your policy for details.
When you use this method, the Internal Revenue Service (IRS) will disallow the transfer if you die within three years of making the transfer.
Create an irrevocable life insurance trust.
Once you transfer ownership of your policies to the trust, you are no longer the owner of them and they will not be included in your estate.
Your trust will then distribute the proceeds to any beneficiary you name.
About the Author
Jessica Adams
Creates helpful guides on hobbies to inspire and educate readers.
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