Mastering Estate Taxes: How to Plan Ahead to Protect Your Financial Assets
Mastering estate taxes involves strategic planning to protect your financial assets and ensure a smooth transfer of wealth to the next generation.
Here are five key strategies to consider:
1. Utilize Cash or Liquid Assets: Executors have nine months from the date of death to pay U.S. estate taxes, making cash or liquid assets a logical choice for payment. While this option reduces financing costs and can be tax-efficient, it may not be in the best interest of beneficiaries to deplete estate liquidity. Selling illiquid assets, like a closely held business, in a forced sale may not yield full value. U.S. tax law offers relief to estates of closely held business owners, allowing extensions of up to 15 years to avoid forced sales.
2. Life Insurance for Peace of Mind: Life insurance, owned directly or through a tax-efficient trust, can effectively cover estate taxes. Term insurance offers a level premium and death benefit for a set period, while permanent insurance accumulates cash value over time. “Second-to-die” insurance is popular among married couples, delaying taxes until the surviving spouse’s death. Insurance held in an irrevocable life insurance trust (ILIT) keeps the death benefit outside the estate for tax purposes, reducing estate taxes. Business owners might use life insurance to support buy-sell provisions in operating agreements, considering tax efficiency in ownership.
3. Borrowing to Avoid Forced Sales: Borrowing can prevent forced sales of business interests, preserve valuation discounts and free up liquidity. It’s crucial to plan how the estate will cover interest and principal payments, ideally using investment income or surplus cash flow. Executors of illiquid estates often face heavy cash needs, leading to unattractive options.
4. Redeem Corporate Stock Holdings: Estates with closely held business interests in corporate stock can redeem shares with no capital gains tax, providing liquidity to otherwise illiquid estates.
5. Alternate Valuation: U.S. tax law allows for a new valuation of estate property six months after death, potentially reducing estate taxes if the estate’s value declines. For ranchers and farmers, real property can be valued based on actual use rather than fair market value, offering attractive options under certain conditions.
These strategies require careful consideration and consultation with tax and legal advisers to tailor solutions to individual circumstances and ensure optimal estate planning.
Rick Barragan is the Managing Director,
Los Angeles Market Manager, for
J.P. Morgan Private Bank.
[email protected] | (310) 860-3658
privatebank.jpmorgan.com/los-angeles
Source: “Mastering estate taxes: How to plan ahead to protect your financial assets,” Jordan Sprechman, Vice Chairman, Practice Lead, U.S. Wealth Advisory, August 20, 2025
