Preparing for Estate Taxes
With careful planning, you can reduce the amount your estate owes and ensure the taxes will be paid as efficiently as possible. Below are five strategies you can consider which might work best for you and your loved ones.
1. Use cash or liquid assets
The upside of this option is that there are no financing costs and selling assets can usually be done in a tax-efficient manner as beneficiaries would likely inherit those assets with a basis adjusted to their fair market value as of the date of death.
2. Buy peace of mind with life insurance
Owning life insurance can be an effective way to pay estate taxes later. Two basic types of policies can be used for estate tax purposes:
• Term insurance – which provides a level premium and death benefit for a stated period of time
• Permanent insurance – which requires a higher initial premium and accumulates a cash value over time
3. Borrow to avoid a forced sale
Borrowing to pay estate taxes can prevent the forced sale of closely held business interests, preserve valuation discounts and free up liquidity. Here are two financing options to consider:
• Borrow from the IRS
U.S. tax law offers some relief to estates that include a closely held business (including certain farm assets) that has a value exceeding 35% of a decedent’s estate.
• Arrange for a Graegin loan
A so-called Graegin loan from a financial institution might satisfy a tax obligation. Often useful for estates that own closely held business interests, the loan also could be used separately – or in concert with government financing when applicable – to pay estate taxes attributable to other illiquid assets, or to pay state estate and inheritance taxes.
4. Cash in corporate stock holdings
For estates that own closely held business interests in corporate stock, there is a special rule that permits redemption with typically no capital gains tax due – rather than as a taxable dividend when a corporation buys the stock from the estate.
5. Alternate valuation might help
U.S. tax law permits a new valuation of all property in an estate six months after the date of death. This law can be helpful to the beneficiaries if there’s been a decline in an estate’s entire value during those six months.
Source: J.P. Morgan Private Bank, November 13, 2023 ‘Plan now: How to prepare for estate taxes’ By Adam Ludman, Tax Advisory, Advice Lab, J.P. Morgan Private Bank, Jordan Sprechman, Practice Lead, US Wealth Advisory, J.P. Morgan Private Bank, and Tom McGraw, Head of Tax Advisory, Advice Lab, J.P. Morgan Private Bank.
