Estate taxes are federal taxes that the government imposes on the assets that a person leaves behind when they die. It affects a person’s estate, or property, and provides funds for government expenses. Once you have come to the point of passing away, your beneficiary will need to pay estate taxes. This is because they are the ones who receive your assets. However, there are some ways in which you can reduce your estate tax or even avoid them by planning.
The beneficiaries of a deceased person’s estate may not be required to pay any estate tax if they meet certain qualifications set by the Internal Revenue Service (IRS). To qualify for this exemption, a person must receive the entire lump-sum personal representative payment and is not required to spend more than $11,200 of that payment before he or she dies. The personal representative must also die at least three years after receiving all of his or her inheritance from the deceased person’s estate to qualify for this exemption.
How can you be sure the money will be there when it’s needed?
The estate tax is an expense that many people fail to account for when making plans for their future and it’s an issue that could affect any citizen, wealthy or not. Estate taxes are often due nine months after the date of death. This is a dilemma because you can’t be sure that the money will be there when it’s needed. But there are several ways to plan how and when you will pay the taxes. If you have a large enough estate or a significant number of assets, an executor might work out an agreement with the IRS to pay these taxes over time or in installments.
The only way to be sure that your loved ones will be taken care of after you are gone is to make careful plans for your estate. In some cases, taxes may not have to be paid at all if certain conditions are met. Careful planning early on can make it easier for your loved ones when they need the money in their lives. Estate tax laws are complicated, so it’s important to have a financial advisor who understands estate law and knows how to protect your assets from excessive taxation.
What are the available estate tax options?
Estate tax liabilities are one of the last things a person wants to worry about when they pass away. However, it is something that many people will have to deal with in the future. What are some options for meeting estate taxes? Undoubtedly, you might have four main sources of funds to pay estate taxes.
They are your current savings and investments, borrowing, liquidation, and life insurance. Current savings and investments are the most common source of funds to pay estate taxes because not only are they liquid assets but they are also likely to change in value. However, it is worth noting that in some cases these savings may be enough to cover the tax bill.
Borrowing/debt is also commonly used as a means of paying taxes because it does not have a large impact on your quality of life after you die. However, this option forces money from your heirs to pay off the outstanding balance.
Thirdly, committing funds from other sources that have appreciated over time will mean that your heirs will inherit those assets with no tax liability attached. But if you don’t have those types of assets or if the market crashes before you die then liquidation may be the next option.
Finally, choosing life insurance could also suffice, with this option, there is an agreement between an individual and life insurance provider that an amount of money will be paid out after the individual dies to help pay for estate taxes or other expenses.
What Can Life Insurance Provide to pay for your estate tax?
One of the more overlooked estate planning tools is life insurance. It’s true, life insurance only works if you die. But when you buy it, your premiums can provide a hefty cash flow to your beneficiaries or a down payment for your estate. If a person has life insurance, they have the opportunity to use this insurance to pay estate taxes.
First, life insurance is available in four different types: term, whole life, universal life, and accident-only policies. The type of policy that a person chooses depends on what they are looking for in terms of premiums and the benefits they hope to receive.
Whether you are buying life insurance with the intent to pay your estate taxes, or you are considering putting some of your assets in a life insurance trust to avoid an estate tax, the best way to plan for an estate is with a consultation with an accountant and/or a lawyer.
