Little-known pension tips to avoid inheritance tax (2024)

FAQs

Are there loopholes for inheritance tax? ›

Place assets within a trust.

Another commonly used inheritance tax loophole is placing your assets within a trust. Your estate will not include these assets and therefore they avoid inheritance tax. Trusts are a great way to leave behind part of your estate to somebody who is too young to handle their affairs.

One type of trust that helps protect assets is an intentionally defective grantor trust (IDGT). Any assets or funds put into an IDGT aren't taxable to the grantor (owner) for gift, estate, generation-skipping transfer tax, or trust purposes.

Shift money to a nontaxable account.

You will pay taxes as you make the transfer, but your money will then grow tax-free, and you will pay nothing in retirement when you withdraw. You may want to stretch those transfers over several years, so you avoid jumping yourself into a higher tax bracket.

Strategies to transfer wealth without a heavy tax burden include creating an irrevocable trust, engaging in annual gifting, forming a family limited partnership, or forming a generation-skipping transfer trust.

The trust fund loophole lets you transfer assets to your heirs without paying the capital gains tax. High-income earners pay the highest capital gains tax rate. So, the loophole benefits them most. Politicians frequently try to close the loophole.

Grantor retained annuity trust (GRAT): A GRAT is a type of irrevocable trust. You can transfer assets to the trust while getting an annuity payment. If the assets in the trust appreciate enough, you can pass that excess value to your heirs with little or no tax.

Irrevocable Trust Uses

To take advantage of the estate tax exemption and remove taxable assets from the estate. Property transferred to an irrevocable living trust does not count toward the gross value of an estate. Such trusts can be especially helpful in reducing the tax liability of very large estates.

How do I withhold taxes from my pension? ›

You can set up or change your withholding by submitting Form W-4P to the payer. Social Security: Withholding isn't required on Social Security payments, but a portion of your benefits may be taxable, depending on your income.

Pensions: Pension payments are generally fully taxable as ordinary income unless you made after-tax contributions. Interest-Bearing Accounts: Interest payments are taxed at ordinary income rates, but municipal bond interest is exempt from federal tax and may be exempt from state tax.

In 2024, the first $13,610,000 of an estate is exempt from taxes, up from $12,920,000 in 2023. Estate taxes are based on the size of the estate. It's a progressive tax, just like our federal income tax. That means that the larger the estate, the higher the tax rate it is subject to.

Inheritance checks are generally not reported to the IRS unless they involve cash or cash equivalents exceeding $10,000. Banks and financial institutions are required to report such transactions using Form 8300. Most inheritances are paid by regular check, wire transfer, or other means that don't qualify for reporting.

Perhaps the simplest way to avoid an inheritance tax bill is to give away your assets during your lifetime. An often over-looked but highly tax-efficient method is to give money out of surplus income.

There is a federal estate tax, however, which is paid by the estate of the deceased. In 2024, the first $13,610,000 of an estate is exempt from the estate tax. A beneficiary may also have to pay capital gains taxes if they sell assets they've inherited, including stocks, real estate or valuables.

The stepped-up basis loophole allows someone to pass down assets without triggering a tax event, which can save estates considerable money. It does, however, come with an element of risk. If the value of this asset declines, the estate might lose more money to the market than the IRS would take.

Can the IRS take inheritance money? Yes, the IRS can take inheritance money for unpaid taxes.