Estate Taxes and Simple Ways to Minimize Them

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13th Aug 2018

Since 1982, California State abolished estate taxes. However, you still need to make provision for the future in terms of keeping taxes down, should the state decide to re-implement these laws.

It is important to note that you should be aware of the tax laws at all times so that you do not lose any of your hard earned estate. This could happen if the estate tax laws are instated again. You might want to use the following ideas to prevent this from happening in the future. The best way to deal with these issues is to contact your estate attorney for effective assistance and advice.

Irrevocable Life Insurance Trusts

One of the ways in which you could minimize your tax penalties on your estate in the future is to transfer small amounts of money into an irrevocable life insurance trust. The amounts you transfer would be equal to a life insurance premium. By doing this, you not only protect your estate, but you can also grow an asset outside of the estate, which is not taxable in most instances.

Material Transfers

California is one of the states that has legalized same sex marriage. In light of this, one must note that the previous tax laws were only applicable to heterosexual marriage. Should you be in a same sex marriage you need to make adjustments to your estate, in order to protect your assets. You need to consult an attorney in order to make sure that your estate is in order, and that you have all the necessary protection against the possibility of the reinstatement of estate taxes.

In both states of marriage –same sex and heterosexual – lifetime gifts and bequested gifts (at death) are not valued in the estate and, therefore, falls outside of the estate, and are not taxed. Thus, these gifts can be used to reduce the estate tax.

What you do need to know too, is that material transfers are only valid if the spouse is a United States citizen.

Lifetime Gifts to Children and Grandchildren

The individuals who would benefit from the estate are usually the children and the grandchildren. To avoid a larger tax on the estate, you could transfer yearly gift funding to the individuals in the amount of $15,000. This amount (as of 2018) would be tax free. As a married couple, you are able to gift $30,000 annually without having to pay any estate taxes. This is another way in which you could reduce the estate taxes.

Transfer to Minors

Another gifting mode is to gift estate amounts to minors. Following a legal route, the gift is assigned to the minor’s custodian to benefit the minor. This gift only becomes available to the minor when he or she reaches the legal age – that is, the age of majority. This type of gifting falls under the same tax exclusion of lifetime gifts.

College Savings Plans

The College Savings plan is another way of saving on estate taxes. In this instance, you are able to front-load the 528 plan for your children or grandchildren. Even though this is only a five year plan you are able to save on income taxes as well as on estate taxes. By using the annual gift method, you can do this tax free. The funds in these accounts will also grow, and remain tax free. It is further protected in that it is meant for tertiary education.

Family Limited Partnership

Family limited partnership is the transference of the family business from one generation to another. The partnership with the children protects the estate assets against creditors. The taxation of the partnership income, at the children’s lower tax rates, assists the business and estate as well.

Qualifying Family-Owned Business Interests

The family-owned business has an Internal Revenue Service (IRS) code that qualifies it for taxes to be deducted from the gross estate. To qualify for this code, that provides this deduction for “qualified family-owned business interest,” the business has to fulfill certain requirements. The business has to be in a fifty percent partnership with a family member or descendant for at least five years. The partnership requires of the individual to have owned fifty percent of the business as well as fifty percent of the business interest of the decendent’s gross estate. As a citizen of the United States, the fifty percent owned by your decendant does no carry value and are often discounted.

Private Annuity

Private annuity is the selling of an asset to your children with the promise of annual payments for the rest of your life. The key is that it is an unsecured promise. These payments are based on the IRS interest rates, as well as the property value. This is not the same as gifting, as the IRS treats it as a sales transaction. The payments are exempt from gift tax, and the property value will be excluded from the estate tax.

Special-Use Valuation – Real Estate

Special-Use Valuation is the valuation of your property in terms of its use. Family businesses and farms can be valued based on the code of the Special-Use Valuation. The code the IRS uses for this is the “actual use” of the real estate that you own. The best person to assist you with this issue is your attorney.

Transfers to Charities

Lifetime gifts to charities can also contribute to the reduction of your estate. In reducing your estate in this way, you are able to reduce the estate tax as well. These lifetime gifts to charities could be made available in such a way that the donor would still have rights to its use until death.


These are only some of the ways in which you could reduce your estate taxes. You should speak an attorney who specializes in estate planning to for further assistance. The attorney will be fully aware of all the taxes and the changes in regard to estate planning. He is able to evaluate your individual situation, give advice, and set the estate plan in motion once you are satisfied. It is wise to do this as soon as possible so that you are protected for any future difficulties around these issues.

Dwight Edward Tompkins has 23 years experience in this field and will be able to assist you with your estate planning. Call 1-714-385-0044 for an appointment.

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