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Death and taxes are inevitable, but you can reduce your death tax

There is a saying that two things in life are inevitable - death and taxes. Perhaps the most upsetting part of that is when the two are combined. In nearly half of the United States - including New Jersey - you or your estate is taxed when you die.

Thankfully, there are things you can do to protect your assets from an expensive death tax. While you could move to one of the states that doesn't impose a death tax, there are better options. Working with an experienced estate planning attorney can help protect your estate from unnecessary financial penalties.

One of the most effective ways to avoid at least a portion of death taxes is by making lifetime gifts. Because of the two-year temporary law, each person is allowed a gift tax exemption of $5 million.

Typically, individuals who gift their assets can benefit from a few advantages, such as avoiding a federal gift tax for gifts that are less than $5. In addition, the person who is receiving the gift is typically not taxed.

There are also ways for individuals to further enhance the lifetime gifts they give. Each person is allowed to give an unlimited number of people up to $13,000 annually without incurring a gift tax or needing to file a gift tax return.

For example, if you have 3 children and 10 grandchildren, you could give each of them $13,000 a year. For each year you did that, you would reduce the value of your estate by $169,000. In addition, as those gifts appreciated in value, it would increase the size of your gift, rather than increasing the value of your estate.

Source: Forbes, "How To Cut State Death Taxes - Without Moving," Hani Sarji, 13 July 2011

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