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How to Ensure Your Inheritance at Tax Time

3. Minimize the damage
If heirs find out they're subject to one or more of the taxes above, there are a few ways they can shield their newfound assets.

In the case of nonqualified money, a hefty life insurance policy won't necessarily push an heir over the state or federal threshold. Bergman says a life insurance policy issued in the name of a wife or a descendant will be part of the estate, but one owned irrevocable life insurance trust would be outside the estate and not subject to taxes. That's not exactly an insignificant distinction for heirs poring over policies.

"If the life insurance trust purchases it originally, it's immediately excludable from the estate, but if it was purchased by the individual and then transferred to a life insurance trust, it's included in the estate for the first three years after the transfer and permanently excluded after three years," Bergman says. "They don't want people transferring life insurance on their death bed, but doing it in time is the easiest way to save money on estate taxes."

If heirs are worried about nonqualified money in an IRA or 401(k), there's a workaround for that, too. If an heir is unemployed, for example, but knows a job is around the corner next year, there's a way for him or her to take out a little money now while saving a lot on taxes later.

"The tax code allows for something called 'multigenerational planning' or 'stretch planning,'" Hobart says. "If you are the listed beneficiary on that account and that account is set up properly, you as the beneficiary have the ability to continue that as a tax-deferred retirement account for your benefit."

During the year after the death of the person holding the account, the beneficiary will start taking a required distribution. The government determines that payout based on life expectancy and keeps it going until the beneficiary hits 85. The beneficiary owes taxes only on what's taken out and, if they choose, they can name their own heirs to that same account and pass it on to another generation. Which leads us to ...
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