05 May How can I be sure the inheritance tax is paid when I die?
Q. Most of my money is in investments, and most of my beneficiaries will face the inheritance tax when I die. But my financial institutions won’t withhold the tax before the inheritances are paid, and there won’t be enough in the residue of my estate to pay the tax. A lawyer gave two suggestions: to ask the beneficiaries to pay back enough to cover the tax or to buy life insurance to cover the cost. I don’t like those ideas so I’m considering adding my estate as beneficiary to get enough to cover the tax. But the estate will also be taxed and I don’t want to be double-taxed. What do I do?
A. We appreciate that you’re trying to avoid trouble for your executors, but there’s a pretty simple solution.
You can remove all beneficiary designations from your financial accounts, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park.
When you add beneficiary designations to your financial accounts, you create non-probate assets, or assets that do not pass under your will, Romania said.
“By removing the beneficiary designations, these assets will become probate assets, or assets that pass through your will,” she said. “You can now set forth in your will how these assets should be distributed, for example, based on percentages of your estate or based on the financial institution the assets are located in or such other method you determine.”
Romania said the amount of inheritance tax paid by the beneficiary is the same whether the distribution is made as a probate asset or a non-probate asset, except in the case of life insurance.
“However, if the financial account is a retirement account, by having it paid to the estate instead of directly to a beneficiary, the payout period may be shortened so if this is the case, further consideration and consultation with an estate planning attorney is recommended,” she said.
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This story was originally published on May 5, 2020.
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