Would you like to leave an inheritance for more than one person? While it might seem fair to split the funds 50/50, after taxes it could actually cause your loved ones to inherit less.
Is it better to leave unequal or equitable assets?
When a beneficiary inherits funds, the IRS will take out taxes on that money proportionate to the beneficiary’s tax rate. If all your beneficiaries have the exact same financial situation, then everyone will inherit the same amount after taxes. If not, then the IRS will tax them unequally but equitably.
To maximize everyone’s inheritance, you may need to work with the beneficiary and a financial adviser. They can help identify the individual’s tax margin and avoid unnecessary tax expenses. If you leave your beneficiary out of the discussion or assume their tax margin incorrectly, it could undermine your efforts to save money.
How can you make an inheritance tax-efficient?
After speaking with your beneficiaries and identifying their tax margins, your financial adviser can help you structure your estate plan in a way that best benefits them. This could include the following:
- Direct the assets from an IRA-type account to a beneficiary in a lower tax margin.
- Blend IRA assets with taxable assets to a beneficiary in a middle tax margin.
- Direct taxable assets to a beneficiary in a higher tax margin.
While it might first appear that one beneficiary is receiving more, after taxes it would balance out. It might also reduce overall tax expense. However, it is important to maintain an open conversation with your beneficiaries about their taxes to ensure your plans correspond with their current tax margins.
Keeping this conversation open could also help to avoid disputes between beneficiaries. Rather than trying to “buy out” or trade sentimental assets for monetary ones based on what they believe is fair, you all can rest assured that their inheritance is equitable rather than equal.