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How can I minimize estate taxes in California?

We all want to leave an inheritance to the people we care about when we die. This explains why most people write wills. Done right, a will can ensure that your assets pass down to your dependents per your wishes.

However, estate taxes (besides probate costs) can eat up a huge chunk of your wealth. So, can anything be done to reduce or eliminate estate taxes altogether?

Understanding estate taxes

Your estate consists of all the assets in your name – from real estate to stocks, bank and retirement accounts and moving assets like cars. While the state of California does not have estate taxes, these taxes apply at the federal level. Estate taxes are taken from your estate upon death before what is left can be distributed to your beneficiaries. The current threshold is high, so most people won’t pay federal estate tax, but, the government could decide to lower it at some point.

Here are two steps you can take to minimize your estate’s taxes

Give away gifts

Gifting away your assets can be a great way to reduce the size of your taxable estate. This is because any asset you gift appropriately is not considered when determining the payable estate tax. Gifts can be in the form of marital transfers, gifts to minors, gifts to family members and charitable organizations.

Set up an irrevocable life insurance trust

An irrevocable life insurance trust allows you to purchase a life insurance policy and, thereafter, transfer the policy’s ownership to the trust. This too reduces the size of your taxable estate. Upon your death, the benefits from the policy go to the trust’s beneficiaries.

Safeguarding your legacy

If you do not want to leave your loved ones in a difficult financial situation upon your death, it is prudent that you figure out how to reduce the size of your taxable estate. Understanding your options and applicable probate laws can help you take the right steps towards this.