How can you avoid federal estate tax?


Quick Answer

Ways to avoid federal estate tax include gifting property up to the allowed annual amount or establishing certain trusts, Nolo advises. People can also pay for someone's school tuition or gift property to charity to avoid federal estate tax.

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Full Answer

There are trusts that can be established in order to help taxpayers avoid federal estate tax. An AB trust is where a spouse leaves his property in trust for his children, but the surviving spouse has the right to use that property for life, Nolo explains. This keeps the deceased's spouse's taxable estate at half the size than if the property is left entirely to the surviving spouse. A life insurance trust allows an individual to take the value of his life insurance proceeds out of his estate.

An estate tax is assessed if the estate is worth more than the established threshold. The IRS determines the size of the estate annually and determines which estates must file a tax return and pay estate tax. Even if the estate is small enough to avoid estate taxes, it could be subject to state inheritance or estate tax. Some states assess tax on all estates, regardless of size, and some states set a threshold amount before estate taxes are assessed. Most states have an estate tax exemption if the estate is left to the surviving spouse, Nolo reports.

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