Taxes And Your Estate Plan

By Paul Deer

They say only two things are certain in life: death and taxes. Unfortunately, sometimes the two come hand in hand, especially if you haven’t planned ahead.

Enter taxes – and your estate plan. Currently, the estate tax only impacts those who are leaving behind more than $5.6 million in 2018. This applies to every taxpayer, so conceivably, a married couple can protect $11.2 million from the estate tax. Because of this, most people aren’t affected by the estate tax – but those who are impacted can pay at least a 40% rate. One of the main reasons people create a plan that considers taxes is because the taxes your heirs may end up owing on their inheritance can be a significant burden.

Planning Ahead to Relieve the Tax Burden

Let’s take a quick example: Betsy and Tom own a prosperous farm, and they have four kids. Nearly all of their wealth is tied up in the land they’ve farmed for decades. When they pass away, their four children could be on the hook for the taxes associated with the value of the land – if they don’t plan properly. (Keep in mind, there is an estate tax marital deduction, which allows assets to pass to your spouse without impacting the estate tax exemption, regardless of the size of those assets, so estate taxes usually only come into play after the second spouse passes. At that point, the estate would likely be impacted with a large estate tax.)

So where will Betsy and Tom’s kids get the money to pay the taxes associated with the estate they will pass on to them? Selling the land can be a slow, costly process and the IRS usually wants its cut of the money in nine months or less. Their kids may not have the capital to pay the taxes out of pocket and trying to sell the farm quickly puts pressure on them to accept an under-market value price for the land

Betsy and Tom could, however, help their children absorb some of the tax blow by using foresight and some planning.