1. Give away assets during your lifetime.

Federal tax law generally allows you to give up to $12,000 per year to anyone without paying gift taxes, subject to certain restrictions. That means you can transfer some of your wealth to your children or others during your lifetime to reduce your taxable estate. For example, you could give $12,000 a year to each of your children, and your spouse could do likewise (for a total of $24,000 per year to each child). You may make $12,000 annual gifts to as many people as you wish. Keep in mind, however, once you give it away, you have given it away, so be sure there is 0% chance you will need it in the future.

2. Giving more of your estate to your spouse.

Federal tax law generally permits you to transfer assets to your husband or wife without incurring gift or estate taxes, regardless of the amount. It is unclear exactly how this is interpreted in same sex marriages, where the marriage is authorized by state law, but not federal, so speak to your attorney if you are in a same sex marriage. Ideally, you and your spouse should have approximately equal estates, although this is not always possible or preferable.

3. Donate to charity.

Charitable gifts to true charities recognized as operating for religious, charitable or educational purposes are not taxed, whether the gift is made during life or at the time of death. There are trusts available by which you, your spouse, and/or heirs may receive the income from your estate during life, with the principal to go to the charity in the future. This frequently results in a win - win situation.

4. Set up a life insurance trust.

Irrevocable Life insurance trusts (ILIT), if drawn up properly, can result in the life insurance proceeds being kept out of your estate while simultaneously giving your heirs liquidity to pay fees, costs, and any immediate expenses. Life insurance is income tax free, but not estate tax free, so a large policy will frequently push an estate over the threshold amount and cause a tax to become due. If you have a large policy (generally, anything over $500,000), it is relatively simple to transfer that policy to an ILIT, subject to certain restrictions, and potentially avoid heavy taxes. An attorney is required to set up an ILIT and, while the process may initially seem cumbersome, the benefit far outweighs the cost and slight inconvenience.
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