Protecting assets from taxes and fees
There are several steps a person can take to protect their assets from taxes and fees. This article lists some of the main taxes and fees and some effective steps to protect assets from them.
What are some of the main taxes and fees?
Taxes and fees can reduce a person’s assets both while they are alive and after their death. Some of the main taxes and fees that could have this effect are federal and state estate taxes, state inheritance taxes, and probate fees.
Estate taxes, sometimes called “death taxes,” are federal taxes owed when a deceased person’s estate has a value over a certain amount. The money for them comes out of the estate itself, and is paid before any assets are given out to the beneficiaries of the deceased person’s will. Thirteen states also have estate taxes at the state level.
Inheritance taxes are state taxes that are paid by the beneficiaries of someone’s will after the assets have been distributed. As of 2022, only six states have inheritance taxes.1 One state, Maryland, has both a state estate tax and an inheritance tax.
Probate fees are fees charged by the court to pay for probate, the legal process where the court makes sure that a deceased person’s will is valid and is being carried out correctly. The court calculates probate fees partly as a percentage of the total assets in the will. This means that the higher the value of all the assets in a will are, the higher the probate fees will be.
How can taxes and fees be avoided?
Some of the steps a person can take to avoid or reduce taxes and fees are to set up a trust, create Transfer on Death (TOD) forms and deeds, purchase a life-insurance policy, learn about their state’s estate tax and inheritance laws, and get professional help.
Set up a trust
Trusts are used to transfer ownership of assets out of a person’s estate. Once the assets are in the trust, they are owned by the trust, instead of the person. Therefore, they do not count in the calculation of estate taxes, inheritance taxes, and probate fees.
Create Transfer on Death (TOD) forms and deeds
Transfer on Death (TOD) forms and deeds allow bank accounts, investments, and property to be transferred directly to a beneficiary on a person’s death, instead of being left to the beneficiary in a will. Because these assets are not in the will, they are not part of the probate process and don’t count toward probate fees. However, they will still count toward estate and inheritance taxes. About 30 states allow TODs.
Care should be taken to make sure that the named beneficiaries in TOD designations line up with what is in a person’s will, letter of last instruction, revocable living trust, and life-insurance policy.
Purchase a life-insurance policy
A life insurance policy can help avoid taxes and protect assets in numerous ways. For example, beneficiaries do not pay income tax on the cash payout they get from a policy’s death benefits, even if the amount is in the millions of dollars. In addition, the cash can be used to buy the deceased person’s shares in a family business to keep it from needing to be sold at short notice.
Learn about their state’s estate tax and inheritance laws
Every state has different estate tax and inheritance laws. Knowing what the rules are can help someone know whether their assets are at risk of being taxed. Helpful information can be found from sources such as The Tax Foundation (taxfoundation.org), SmartAsset (smartasset.com), and Investopedia (investopedia.com). Simply entering your state’s name and the term “estate and inheritance tax” into a search engine is also an effective way to find up-to-date information.
Get professional help
Estate planning lawyers, notaries, and other legal and financial experts can provide valuable advice and help in drawing up documents. Also, only a lawyer can create a trust.
Assets and liabilities
Asset protection trust
Creating legal documents
Engaging an attorney
Estate and inheritance taxes
Financial plans versus estate plans
Life insurance trust
Overview of estate plans
Overview of trusts
Revocable living trust
Special needs trust
External supporting content
1Inheritance Tax: What It Is and How to Avoid It. NerdWallet.com.