Are there legal ways to protect your inheritance from taxes?

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Understanding what an inheritance tax is can help you plan and properly manage your wealth. In definition, this particular ‘death tax’ is slightly different from a state tax since the former are obligations paid by heirs, not by the deceased’s estate.

As of 2016, there are only six states in the U.S. that collect inheritance taxes. Two of them, New Jersey and Maryland, are legally mandated to collect estate taxes as well.  However, the rates imposed on these inheritance taxes will always depend on the relationship between the heir and the deceased—and this information is useful when handling your assets.

If the inheritance will come from parents or even from other family members, setting up a trust to manage your assets is a wise and practical way to get started. A trust will enable the beneficiaries to avoid state probate requirements and related expenses that go with them.

However, choosing between a revocable trust and its irrevocable counterpart can be tricky. Opting for the former means grantors can easily take the assets out if needed, while the latter ties up the specific assets until the death of the grantor.

It’s also important to consider can alternate valuation date. There are instances in which an executor may choose a specific valuation period, six months after the date of the grantor’s death. However, this option’s availability depends on one factor: if the change in valuation can decrease not only the gross amount of the estate but also its state tax liability.

If you’re a grantor, properly and legally managing your inheritance without being burdened by taxes can be really challenging but there’s another option that will not only reduce the size of your taxable asset, it can also provide instant benefits to your loved ones: gifting.