6 Ways To Pay Estate Tax

Benjamin Franklin said,?“In this world nothing can be said to be certain, except death and taxes.”

For wealthy families this may be even more apparent in paying the Estate Tax.

So what is the the estate tax?

Simply put, it is a tax on your right to transfer property at your death.

So you have what's known as an Adjusted Gross Estate, or “Taxable Estate”, which consists of an accounting of the fair market value of your assets, less any applicable deductions.

A "Taxable Estate" in excess of the applicable "lifetime exemption" will be subject to the Estate Tax. For 2024 the exempted amount is $13.61M. For 2025, it will increase again based on inflation.

However, if Congress does nothing, this exemption amount will 'sunset" at the end of 2025 to $5M, adjusted for inflation. And, the applicable tax rate is 40% with taxes being due within 9 months from the date of death.

THE 6 WAYS TO PAY THE ESTATE TAX:

#1- Cash or Securities- this is straightforward. You can "wait & see" what the Estate Tax will be and handle the issue at that time. This gamble assumes you have cash and/or cash equivalents to utilize for making these payments. In general, the estate tax is due within nine months after the date of death!

#2- Forced Sale of Assets- if an estate doesn’t have any liquid assets to pay the tax, it can be forced into selling illiquid assets. The is also a short window to pay the government and this could result in these assets being sold at severely discounted rates. The net effect is having to sell more of your assets than are required to fund the tax which becomes much more expensive to your estate, in turn reducing the assets left to heirs.

#3- Use a Loan to Pay Estate Tax- to avoid the forced sale of illiquid assets, an estate may borrow against those assets to pay the tax due. This can be an effective way to maintain family ownership in closely held businesses and may also have some benefits to the estate. Loan interest, derived by loans, to pay estate taxes may be deductible in certain circumstances. In certain circumstances, a lump-sum deduction can be taken for estimated future interest payments.

#4- Intra-Family Loan- this is an alternative to a commercial lender and it is where you can obtain a loan from another family- owned entity to pay the estate tax due on less liquid properties. The advantage of such arrangements are realized by the difference in potential tax savings to the estate and the income tax due by the entity receiving interest payments.

#5- Section §6166 Election- this is a very specific & only allowed under special circumstances which is to apply for Section §6166 Election- this is where an estate may qualify for a 5-Year Deferral followed by a 10-Year Installment Plan. The language of §6166 is quite strict in determining if an estate qualifies for the extension. Also, the utilization of this option is complex. The option to defer under §6166 applies only to owners of closely held companies when the value of the taxpayer’s interest exceeds 35% of the Adjusted Gross Estate. Only the tax attributable to the value of the business may be extended under this section.

A word of caution: a tax lien may be placed on the assets held in the estate until the tax has been completely satisfied. This can inhibit the company’s ability to obtain other debt needed in the regular course of business.

This strategy also requires faith that the government will continue to provide this option many years into the future and as such may not be a reliable source of relief.

#6- Purchase Life Insurance- this may often be one of the most efficient ways to fund a future liability at death. However, the individuals involved may need to prepare for it now as premiums can increase the older you get & proof of insurability could be an issue. Remember: life insurance enjoys a tax-free death benefit. The beneficiaries of a life insurance policy typically would have immediate liquidity to pay the estate tax, thus eliminating the need to apply for loans, petition the IRS for relief or sell off assets at an unfavorable time.

As always, I am here as a life insurance professional & advisor, but you should consult with your legal and tax professional team when deciding what is right for you.

If you have questions about THE SIX WAYS TO PAY FOR THE ESTATE, please reach out to me at 704-288-4999 , at my website www.pomfretfinancial.com or you can watch my 3 part video series on my You Tube by clicking HERE.

Important Reminder- in the ever-changing landscape of the Internal Revenue Code and its current interpretations, this should give you pause on relying on any one subsection.

In dealing with tax uncertainty, diversifying your strategy may be a prudent path. Also, utilizing assets like life insurance can be used as a good investment, should the decision ultimately be to utilize life insurance as one of the alternative solutions.

-Edwin

Edwin B. Peacock III CLU, ChFC

Securities offered through Valmark Securities, Inc., Member FINRA, SIPC. Investment Advisory Services offered through Valmark Advisers, Inc.; a SEC Registered Investment Advisor 130 Springside Drive, Suite 300 Akron, Ohio 44333-2431 1-800-765-5201

The material presented is for informational purposes only and is not intended provide specific advice or recommendations for any individual nor does it take into account the particular investment objectives, financial situation, or needs of individual investors. Any tax or legal related information discussed is provided as general education and should not be considered a recommendation. We cannot provide tax or legal advice. Further, you should seek specific tax or legal advice from your legal or tax professional before pursuing any idea contemplated herein.