How to Avoid Estate Tax

If your net worth is above $11.5 million (single) or $23 million (couple with a living trust), it may be time to start thinking about how to avoid estate tax as much as possible.

But before we go further, we suggest those of you with $10+ million investable liquid assets request your free copy of this in-depth wealth management and estate planning guide.

The insights you’ll discover from our published book will help you integrate a variety of wealth management tools with financial planning, providing guidance for your future security alongside complex financial strategies, so your human and financial capital will both flourish.

Clients frequently share with us how the knowledge gained from this book helped provide them tremendous clarity, shattering industry-pitched ideologies, while offering insight and direction in making such important financial decisions.

If you’ve been well beyond $11.5/$23 million for a while and have been putting this off, now is the time to act if you want to prevent a third or more of your estate from going to the government. As an ultra-high net worth individual, your financial picture, life goals, how you spend your time, what you need, and what’s important to you differ radically from everyone else.

Also, if you happen to live in one of the states that also charges an estate tax, you are already past their exemption, as the highest state exemptions currently stand between $5-6 million.

In a moment, we’re going to show high net worth and ultra-high net worth families like you ten strategies for how to avoid the estate tax. But first, let’s clarify what the estate tax is and how it works.

Ultra Rich Skip Estate Tax

Due to the tax system overhaul enacted by Republicans in 2017, the amount that the wealthy can pass on to their heirs without an estate tax levy has doubled. This fact along with various other tax reduction techniques allows for a minimization of estate taxes paid.

The 4 Main Types of Taxes on Inheritance

What is estate tax?

Estate tax is a federal tax levied on everything you own or have certain interests in when you die. The fair market value of these items is used, which can differ from what you paid for them. The total is your “gross estate.”

Estate tax is a progressive tax like income tax. The rate varies with the size of the estate, from 18% to 49% (see the table below). Most people are not affected by estate tax because a gross estate of less than $13,610,000 is not taxable.

In addition to the federal tax, some states have their own estate tax—Connecticut, District of Columbia, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington, each with its own tax rate.

2024 Federal Estate Tax Rates

Federal Estate Tax Rates

Taxable Amount	Estate Tax Rate	What You Pay
$1 – $10,000	18%	– $0 base tax  – 18% on taxable amount
$10,000 – $20,000	20%	– $1,800 base tax  – 20% on taxable amount
$20,000 – $40,000	22%	– $3,800 base tax  – 22% on taxable amount
$40,000 – $60,000	24%	– $8,200 base tax  – 24% on taxable amount
$60,000 – $80,000	26%	– $13,000 base tax  – 26% on taxable amount
$80,000 – $100,000	28%	– $18,200 base tax  – 28% on taxable amount
$100,000 – $150,000	30%	– $23,800 base tax  – 30% on taxable amount
$150,000 – $250,000	32%	– $38,800 base tax  – 32% on taxable amount
$250,001 – $500,000	34%	– $70,800 base tax  – 34% on taxable amount
$500,001 – $750,000	37%	– $155,800 base tax  – 37% on taxable amount
$750,001 – $1 million	39%	– $248,300 base tax  – 39% on taxable amount
$1 million+	40%	– $345,800 base tax  – 40% on taxable amount

Source : https://smartasset.com/taxes/all-about-the-estate-tax

What’s Inheritance tax?

Inheritance tax is a form of tax imposed on the beneficiary who receives an inheritance gift. There is no federal inheritance tax in the US. There are only a few states that impose an inheritance tax, and these are Iowa, Kentucky, Maryland Nebraska New Jersey, and Pennsylvania, while for the first state mentioned above, its inheritance tax will be phased out by 2025. Maryland is the only state that has an estate tax as well as an inheritance tax. Every state has its exclusions, and the tax rates are between 6% to 10%.

Capital gains tax

Capital gains tax is applied when an asset sells at a higher price than the purchase price. It is levied on the earnings from the sale of assets, such as stocks, real estate, art objects, and insurance policies. A capital gains tax is charged on inheritance when the beneficiary sells off assets they have acquired in an inheritance.

Additionally, individuals must file their capital gains tax rate based on income, which can range from 0% to 20%. The rate of capital gains tax also differs based on the individual’s tax bracket, the length of time an asset was held prior to sale, and any strategies used to minimize or defer tax obligations. Certain exemptions may apply, such as the capital gains tax exemption for eligible investments held for a specified period.

Income tax

Inherited assets are not a form of income, but one may have to pay income tax if the asset was in an account that wasn’t subjected to the federal government and hence had used pre-tax contributions. Taxation of withdrawals made from a pre-tax account comes into play when inheritance is involved. On the flip side, you will not be liable to tax when you invest the funds in another pre-tax account (roll-over). Withdrawals from these accounts are typically taxed as ordinary income.

10 Ways How to Avoid Estate Tax?

1. Buy Life Insurance Now and Use the Benefit to Pay the Tax
2. Move to a State without Estate Taxes
3. Give Money to People While You Still Can
4. Set Up an ILIT, an Irrevocable Life Insurance Trust
5. Set Up a Charitable Trust
6. Set Up a Donor Advised Fund
7. Set Up a Family Limited Partnership or a Foundation
8. Invest in a Business Such that Your Heirs Become Part-Owners
9. Just Spend It or Give It Away
10. Married Couples – Double Your Exemption Amount

Let’s look at how to avoid estate tax with each of these options.

Hopefully you now appreciate the urgency of this situation. To the wealthy, it means that if you are an ultra-high net worth family and have over $30 million in assets – your estate will pay dearly once you die unless you implement some of the strategies we’ll tell you about.

Thus, be careful – the things you are about to learn may help your save tens of millions. This may be the most critical “how to avoid estate taxes” information that will ever cross your path.

1. Buy Life Insurance Now and Use the Benefit to Pay the Tax

For those of you who are wondering—no, we do not sell life insurance.

This approach is ineffective when one nears the end of his or her life. The time to put this strategy in place is yesterday. The idea is simple: Buy life insurance now and secure it a death benefit that will cover a good-sized portion of the estate tax you expect to owe.

This allows your heirs to pay the tax without having to deplete their inheritance. You will pay much less for the life insurance than you would have paid in taxes. And again, the idea here is to give your heirs the cash they will need to pay the tax.

But this strategy doesn’t really show you how to avoid estate tax. It just makes it easier to deal with. Keep reading…

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2. Move to a State without Estate Taxes

Remember – you have federal AND state estate taxes if you live in one of the states that charges one. Again, see above for a list of the states that charge estate taxes, to help you with how to avoid estate tax.

If you do live in one of these states, the simplest way to avoid paying the state estate tax is to move.

Now, if you own multiple properties in that state, be careful. Your residency status can be up for debate and might land you in court if you try to avoid the state tax. Many have done so, and lost. It’s crucial to learn how to determine residency to avoid double taxation on your taxable income.

3. Give Money to People While You Still Can

What you would prefer to do is give your money to loved ones; secondly, the causes nearest and dearest to your heart now. The estate will immediately be reduced one way or the other through your gifts to your heirs. If you can give enough away to stay below certain limits, you can reduce the estate taxes you owe.

For example, if your estate is worth $15 million right now, and you don’t expect it to change much because you’re spending at an enjoyably high level but also still earn well on your investments and other income to make up for it.

As part of how to avoid estate tax, start gifting money to family and friends – up to $15,000 per person per year, or $30,000 if married – and if you can get your estate value down below the exemption, you can avoid paying estate taxes later. Just keep in mind that these gifts do not count against your $11.58 million exemption.

This tactic is ineffective for estates that are characterized by an ultra-high net worth, passing far beyond exemption limits.

If you would like to talk to someone who is highly knowledgeable on gifting and its effects on estate taxes, especially for high net worth investors, contact Hutch Ashoo Co- founder of Pillar Wealth Management, using the below phone number or email address. Hutch can give you the advice you need.

4. Set Up an ILIT, an Irrevocable Life Insurance Trust

This kind of trust ensures that after the death of a spouse, the surviving spouse doesn’t inherit a big estate tax penalty.

For instance, suppose your family has a $50 million estate and each spouse has a $10 million life insurance policy. When the first spouse dies, if the other spouse is the beneficiary, they will get the $10 million benefit. But now the estate is worth $60 million. $4 million of that increase is essentially earmarked for the estate tax before you even see a dime of it.

An ILIT prevents this from happening by altering the structure of your life insurance.For details on this and other estate tax avoidance strategies, schedule a free  all with Pillar Wealth Management CEO and co-founder Hutch Ashoo to learn more about how to avoid estate tax.

5. How to Avoid Estate Tax with a Trust

Let’s continue with learning how to avoid estate tax.

There are two main types of charitable trusts – remainder trusts and lead trusts.

Both work by assigning portions of your estate – which can be hard assets, investments, or cash – as charitable donations, thereby removing the value of these from your estate.

For instance, if you owned a business property, you could assign it to a trust. When it is sold, the proceeds would go into the trust, which removes that value from your estate.

The details of charitable trusts can be very complex. You cannot do it alone. You have to assemble a team composed of a tax accountant, an estate lawyer and finally a wealth manager in order for everything to be put into place correctly so it goes according to design plan. When it comes to trusts, the requirement to have a team working with you is basically non-negotiable.

If you’d like to talk to someone highly knowledgeable about trusts and their impact on estate taxes, specifically as they apply to ultra-high net worth investors, contact Hutch Ashoo, co-founder of Pillar Wealth Management, at the phone number or email address below. Hutch can give you the advice you need and show you how to avoid estate tax.

6. Set Up a Donor Advised Fund

A DAF is sort of like a health savings account. It is a separate account for investments to grow tax-free, dedicated to one particular use. The goal of a donor advised fund is to direct that money towards charity.

Unlike a trust, you remain in control of the money because it is up to you when and which charities; i.e., where your fund would best go towards its intended goal, and after you die, your heirs can continue to manage it.

But once you put money into the DAF, it is removed from the value of your estate. So, this helps you understand how to avoid estate tax. It also gives you a nice tax break the following year.

7. Set Up a Family Limited Partnership or a Foundation

These are two more options for avoiding estate tax. Both of these options involve starting a new organization.

A foundation tends to focus on charitable giving, but it remains under the control of your estate. With a foundation, you can decide what area of need you wish to focus on. It might be college scholarships, medical research, environmental stewardship, business grants, art endowments – there isn’t much to limit you here.

A family limited partnership, like a trust, is also very complicated to explain and set up.

In short, it’s an arrangement where your investments can still be managed by you, but they are protected from entities such as creditors or divorced spouses who are not direct relatives and should no longer have access to your estate.

Can this help you with understanding how to avoid estate tax? Well, when you die, or at a specified time, the management of these funds transfers from you to your “limited partners,” who are generally your heirs. When this happens, they get a three-part tax break on income, estate, and gift tax, and potentially tax on real estate. It’s crucial to consider your tax filing status in this context as well.

Again, you will need a team of experts to make a family limited partnership work. But the wealth protection and tax savings you can gain from it make this one of the most powerful strategies on this list of how to avoid estate tax.

For details on this and other estate tax avoidance strategies –Schedule a Free Call with CEO and Co-Founder Hutch Ashoo to learn more about how to avoid estate tax.

8. Invest in a Business Such that Your Heirs Become Part-Owners

You may have a friend or associate who wants to start up a business and needs capital. If the situation works out right, you may be able to arrange for your heirs to become partial owners of the new business, reaping some of the profits that are eventually generated.

This is certainly a riskier option, but if you are in the business-startup game and this kind of arrangement is familiar and attractive to you, this is a way to reduce the value of your estate while giving your heirs a stake in a new business. So, it’s one more option for how to avoid estate tax.

9. Just Spend It or Give It Away

Nothing stops you from reducing the value of your estate (and thus profiting from how to avoid estate tax) by just spending the money or giving it directly to charity now. You can donate unlimited amounts of money to charity anytime you want, reap tax benefits the next year, and reduce the value of your estate. You can also give away properties and other hard assets.

Also, you can increase your spending on yourself. Travel more. Try out new experiences. Live it up. If you have the funds to spare and want to reduce your taxes, just use the money for yourself, and it won’t go to the government. You can also talk to your friends and colleagues about how to avoid estate tax by spending more.

10. Married Couples – Double Your Exemption Amount

This is our last strategy for how to avoid estate tax.

In considering how to avoid estate tax, in addition to having an estate plan, you should have a living trust. In your living trust, you can specify that your estate gets split between you. When the first spouse dies, that person would get to use their exemption on their portion of the estate. When the second spouse dies, that person gets to use theirs. It’s also important to consider your primary residence within the context of your estate planning strategy.

For example, let’s go back to that $20 million hypothetical estate. Your living trust could assign $10 million to each spouse. When the first spouse dies, their $10 million falls under the $11.58 million exemption. And their estate plan can then direct where those funds go.

When the second spouse passes away, he or she would be entitled to an exemption of $11.58 million for his or her portion of what has devolved on them as a beneficiary(s) from the estate, which was available at year 20XX when they died (this may vary in due course). This becomes part of your strategy for how to avoid estate tax.

The Best Way to Avoid Estate Tax

If the total value of your estate adds up to more than the exemption limit, you will pay estate taxes on everything above that limit.

As of 2020, the federal exemption limit sits at $11.58 million per estate, and it will climb with inflation until 2025. If Congress does nothing before then (and that is their specialty, right?), the exemption will revert to its previous level, down around $5.49 million.

As you do not know when your death will happen, the best way to fight estate tax and in particular federal estate would be for people to plan ahead personally.

Calculating your tax liability starts with calculating the value of the estate by including gifts and then subtracting debts. There is more to claim for your estate than just the cash in bank accounts, investments or retirement assets. It encompasses your investment property, business real estate properties, boats and art objects as well as non-cash assets.

This is the very point where trouble starts. Assuming that your estate is worth $20 million, of which you have a reportable amount of $18 million in real property, rental property, a business involving six cars directly or as personal goodwill together with some art. That leaves only $3 million in liquid assets to pay estate tax with, so you can only benefit from learning how to avoid estate tax.

Thus, your heirs will possibly be forced to QUICKLY (meaning at a discount) sell assets, maybe even the business or some real estate, just to pay the estate tax. After all Uncle Sam doesn’t like to wait past the deadline to collect their money. Not an enjoyable chore for your beneficiaries.

Where does that $3 million number come from? The estate tax kicks in after $11.58 million has been exempted. The tax begins at 18%, but it climbs fast, and reaches 40% for all assets $1 million or more beyond the exemption. In other words, any amounts over $12.58 million will be taxed at 40% by the federal government.

If you have a $20 million estate upon your death, your estate will owe $345,800 for your assets between $11.58 million and $12.58 million. $7.42 million remains after that (20 – 12.58), and that amount will be taxed at 40%, which comes to $2.968 million. Add the $345k to that, and you get $3.3138 million in estate tax owed. You may appreciate the need to understand how to avoid estate tax, if possible.

For more details on these calculations and federal estate tax rates, which also shows the tax rates and exemptions for each state that levies an estate tax.

And if you’d like to talk to someone highly knowledgeable about estate taxes, specifically as they apply to ultra-high net worth investors, contact Hutch Ashoo, Co-Founder of Pillar Wealth Management at the phone number or email address below. Hutch can give you the direction you need.

How to avoid inheritance tax

What is inheritance tax?

Inheritance tax applies only at the state level. It is a tax paid on money that is inherited, although some close relatives may not be taxed, which depends on the rules of the state. Only a few states have inheritance tax — Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.

Up to $12.6 million in assets can be passed on before the federal estate tax is applied. Only some states charge an estate tax.

1. Be sure to write a will.

By specifying in a will that your spouse will inherit your entire estate, then he or she will not have to pay inheritance or estate tax.

2. Use the alternate valuation date.

You can reduce the value of your estate (on which the tax amount will be calculated) by specifying that the value of the estate six months prior to the date of death, which is typically lower, should be used for the valuation.

Start planning now to reduce your inheritance tax burden.

It’s critical to make a will as soon as you start to accumulate some money or other assets. Your will cannot include too many details regarding how you want your wealth to be distributed after you die. Talk to a tax specialist, money manager, or financial advisor about estate planning. Go online and get informed about wills and trusts.

3 Estate tax planning strategies

Determine who will carry out your estate plan

In your will, you should specify who will have power of attorney if you die or are incapacitated. That person will make all financial decisions on your behalf. You may need is to choose a guardian for your children who have not reached majority. The lack of capability to make medical decisions for yourself would be covered by a health care power of attorney.

Routinely, check the recipients of your retirement plans.

Make sure that all your accounts reflect how you want those investments to be disbursed, particularly in the case of a divorce or death in the family.

Be familiar with the federal and state estate and inheritance taxes

It is critical to understand how and where estate and inheritance taxes are applied. Just the state where you live can strongly impact the taxes that have to be paid on your estate.

If you’d like to talk to someone highly knowledgeable about marriage exemptions, their impact on estate taxes, and how to avoid estate tax, especially as these issues apply to ultra-high net worth investors, contact Hutch Ashoo, Co-Founder of Pillar Wealth Management, at the phone number or email address below. Hutch can give you the advice you need on how to avoid estate tax.

In effect, you can get a $23 million exemption using this strategy, unless Congress changes the numbers.

To learn more about how to avoid estate tax and more details on other estate tax strategies –Schedule a Free Call with Pillar Wealth Management CEO and Co-Founder Hutch Ashoo to learn more about how to avoid estate tax.