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Wealth Transfer? Here’s What You Need to Know

When it comes to planning the distribution of your estate, there are many questions clients are often asking themselves. Are my heirs responsible? How can I avoid the probate court? How can I make sure my grandchildren are taken care of? Then after considering the moving pieces associated with these complex decisions, clients seldom know where to start. Our answer often starts with one thing: taxes.

In fact, not many people think about the tax treatment of different accounts for their heirs, but it is one of the most important estate planning topics that should be considered. If you’re leaving an inheritance, or are an heir yourself, the tax code can have a substantial effect on the how the assets are to be distributed. Here are some of the basics you should consider as you’re planning your estate.

Consider Individual Tax Liabilities

Do you have a large amount of your estate in an IRA? Well, whenever there is a pretax account granted to someone, they also inherit a tax liability. Do you own a non-qualified annuity? People seldom realize that all of the gains in that annuity are taxable to their heirs upon distribution. And the tax they will pay on that inheritance will be based on; you guessed it, that individual’s own marginal income tax rate. So even if you are intent on dividing your estate equally amongst siblings, the actual net inheritance can change drastically due to personal tax circumstances. Understanding the rules for distributions after life will help you make more prudent choices that best suit you and your family.

Understand Other Tax Liabilities

If the inheritance being passed to someone is in the form of property or an estate there may also be taxes to consider that could also significantly change the inheritance amounts. For example, in some circumstances, a state estate tax will be levied on any property left to heirs. In many cases, this tax may be taken from the value of the estate before the assets are distributed. A capital gains tax may also come into play if a property that’s inherited is sold for a profit after the date of death. It’s important to understand the state and federal tax laws that will apply to your inheritance.

Tax Mitigation Strategies

There are many ways we can plan your wealth transfer in a more tax efficient manner.  Utilizing life insurance, converting a portion of your pretax assets during life, or creating a comprehensive gifting program to your family members are all viable strategies. There are also ways to define how and when assets can be inherited with private trusts. It’s always important that prior to taking any meaningful steps, you have a firm grasp on all of the options available. This will ensure you are making decisions with conviction.

Speak with a Trusted Financial Adviser

Meeting with a financial advisor to discuss your future financial plans is critical if you want to create a tax-efficient inheritance strategy. Optimizing in this way requires strategic insight, advice, and planning. Call Toomey today!