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Estate tax savings strategies

Individuals who take the time to establish an estate plan, often spent years creating and updating its provisions as their lives and financial and familial circumstances change. In cases where an individual has amassed a considerable amount of assets and plans to leave all or a portion of his or her wealth to children and grandchildren, it's important to seek the advice and assistance of an estate planning attorney.

Unfortunately, the heirs of wealthy individuals who fail to take steps to reduce estate tax liabilities may end up losing a sizable chunk of their inherited assets. Last fall, the Internal Revenue Service announced that the estate tax and gift tax exclusion limit for 2016 is $5.45M. This means that, if no action is taken, individuals with assets in excess of this amount are subject to a 40 percent tax on that amount.

Depending on an individual's circumstances and where the bulk of one's assets are held, an estate planning attorney can recommend different strategies to reduce or even eliminate the amount of estate tax your heirs will be required to pay. For example, a family home is often one of, if not the most valuable assets an individual owns. By establishing what's known as a Qualified Personal Residence Trust, an individual effectively shields the value of a home from being subject to any estate tax.

Using a QPRT, a home is left to a trust with a designated beneficiary. An individual sets the term limits of the trust and is also able to continue to live in and reap the "income-tax benefits of home ownership." The gift tax benefits depend on the time limit set for the lifetime of the trust and, if not set up correctly, an individual's heirs may not see much in the way of estate tax savings.

In addition to a QPRT, an individual would also be wise to start taking advantage of the annual gift tax exclusion which, for 2016, the IRS kept at $14,000 per person. This estate tax savings strategy can be especially effective in cases where an individual has a large family and/or is able to take advantage of the exclusion for several years.

Source: The Motley Fool, "3 Smart Strategies Designed to Reduce or Eliminate Estate Taxes," Matthew Frankel, Oct. 3, 2016

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