Accounting Articles > Estate Planning:
Estate inheritance planning
The problem here is making sure that your assets actually go to the people you would like to will them to, rather than those assets being sold to cover estate taxes. The Chicago Cubs are no longer owned by the Wrigley family, because upon the death of the family patriarch, several family assets had to be sold in order to pay the estate taxes.
Let’s use an example to illustrate the on-going problem. Let’s say that you have a mid-sized estate. You assets are as follow:
| Family Home | $500,000 |
|---|---|
| Vacation Home | $300,000 |
| Checking & Savings Accounts | $100,000 |
| Stocks, Bonds & CDs | $300,000 |
| Business Property | $1,700,000 |
| Business | $1,000,000 |
| Total | $3,900,000 |
The estate tax credit is currently $2,000,000. All assets left in an estate over that limit are generally taxed at about 55%. In this instance, the estate will have to pay 55% of $1,900,000, equalling $1,045,000, in tax which is due no later than exactly nine months after the date of death.
There is only $400,000 sitting in cash or investments to pay this tax. Where is the executor going to get the additional $645,000? What is the executor going to do? Normally, by the time we find out roughly how much will be due, there’s only four or five months left before The Internal Revenue Service starts charging penalty and interest.
What normally happens is that your heir starts selling off the assets that you wanted them to have in order to pay the estate taxes.
If they sell of the family home, it’s not enough. If they sell of the vacation home, it’s not enough. If they sell of the business property, they won’t have anywhere to conduct the business. Let’s also remember that they don’t have a lot of time. Anything that they sell will be sold at fire sale prices.
Estate or inheritance planning is the orderly process of making sure that this doesn’t happen. We can split the estate, put the real estate into trusts, and gift away portions of the business to reduce the problem. As long as the estate at the time of death is valued at less then the credit, there won’t be an estate tax issue.
Please call a competent professional immediately. If you wait too long, little or nothing can be done.
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