Estate Tax and Incident of Ownership

What does it mean when someone says that you cannot retain any incident of ownership in an asset if you want to reduce your estate tax liability?

An incident of ownership is any interest or right that you have and maintain in a particular asset. This includes any interest that allows you to change, modify, use, and/or benefit from that asset in any way.

One strategy that is commonly used to reduce estate tax liability is to “gift” particular assets to your beneficiaries. However, to effectively reduce estate tax on the gift, you, as the original owner, must not retain any incident of ownership in those gifted assets. Mistakes using this gifting strategy, i.e., not removing all incidents of ownership, are commonly made with real estate and life insurance.

Estate planning is complicated so it is important that you discuss any estate planning strategies with your personal advisors as individual circumstances vary. There is no use in developing a thorough estate plan if it cannot be executed the way you intend.

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