Surviving spouses are not required to pay inheritance tax, and taxes are not assessed on living trusts or on gifts up to a value of £715, per U.S. law as of October 2010. But if you['re not a spouse or a recipieint, how do you legally avoid inheritance tax? If you set up an irrevocable trust, your heirs and beneficiaries can avoid paying any inheritance tax at your death. A trust is a fiduciary relationship regarding property that is held by a trustee for benefit of a beneficiary or beneficiaries. An irrevocable trust is one that cannot be revoked or altered after it is made.
Create a list of your assets. These should include any personal possessions of value (including antiques, jewellery and artwork) as well as property, automobiles, boats and other high-ticket items.
Create a list of beneficiaries: the people, organisations or institutions you wish to receive your assets or financial support through the trust. Trusts can be private, with no noncharitable beneficiaries; or they can be charitable trusts -- that is, only a charity or charities are named as the beneficiaries. Also consider individuals whom you wish to exclude from your estate and determine if you want to explicitly list their names in the trust documents, with your intentions to exclude them.
Fill out a trust form such as those obtained on legal websites like LegalZoom.com or solicit the help of an attorney or estate planner in creating your trust documentation.
For an irrevocable trust to be valid, the following conditions must be met: you must intend to create the trust, the trust must have a purpose, property must be attached to fund the trust, beneficiaries must be named and a trustee must be identified.
Take the necessary steps to complete the trust. You may need to transfer the deeds for your real property to the trustee, or transfer ownership of a bank account to the trustee, to fund the trust.
Have the trust and accompanying documents notarised. This creates a legal document that verifies the completion of your trust.
Enjoy witnessing the benefits of your wealth with a revocable living trust or gift. For those who prefer not to sign into an irrevocable trust and prefer to distribute some or all of an estate while they are still living, options for tax-free income dispersal include pre-death disposal of selected assets. As playwrights Kaufman and Hart understood, you can't take it with you.
Living trusts set aside tax-free funds for your spouse and children so that after your death, exemption amounts for both spouses are applied to the estate balance. The reduced tax burden combined with the trust itself will help to ensure your family's financial security after your death.
Distribute smaller amounts of assets in the form of tax-free gifts. As of 2010, a recipient can receive a gift of cash or items of a value of up to £7,150 once per year on a tax-free basis.
Keep in mind that irrevocable trusts cannot be amended or changed in most instances.
IRC §2035(a), referred to as the "look-back rule," was implemented to prevent deathbed transfers of property made to evade estate taxes. Gifts and transfers, including those in an irrevocable trust, that exceed the annual gift exclusion are subject to this rule if they were made within the three years preceding the deceased's death. If the gift falls within this rule, estate taxes or inheritance taxes will be assessed.