As many Minnesota readers can imagine, a big part of estate planning is effective tax planning. We discussed this issue in a recent post as a part of the controversy over the actor James Gandolfini’s will, where tax and other considerations were likely both at play.
Whatever your priorities are, it is important to be aware of the applicable taxes. There are a variety of ways that taxes could impact the way that an estate is distributed and the gifts that loved ones actually receive, but the good news is that they are almost entirely foreseeable.
One example of this is the different tax liabilities for different types of assets. Let’s take a life insurance policy, which is typically not taxable as income when it is paid if the beneficiary is someone besides the holder or the estate. This means that if you keep your name on the policy as a beneficiary or pay it to a trust that you can still access, it will likely be taxed and the ultimate gift to heirs and beneficiaries will be diminished. Alternatively, one could name a specific person as the beneficiary under the policy, in which case it would likely not be taxed.
This is important both for preservation of assets and for understanding the ultimate value of a specific gift. For example, someone intends to give each of their two children gifts in equal amounts and decides to designate specific assets to fund the gifts. So, they take out a life insurance policy for $50,000 and designate one child, and then add the name of their other child as a beneficiary to a retirement account with $50,000 in it. While these gifts seem equal on the surface, the retirement account will be subject to taxes, leaving that child with less than their sibling. Of course, all of these types of gifts are also subject to federal and state gift tax exemptions as well.
Source: Reuters, “Plan now to avoid inheriting a tax mess,” Amy Feldman, Aug. 8, 2013