The Federal Estate Tax

The federal estate tax is an excise tax on the right to transfer property at the date of death. The gross estate includes the fair market value of ALL assets owned by the decedent as of the date of death, including life insurance policies. The top estate bracket is 48% on estates over $2,000,000.

At a person's demise there are certain typical problems, which, if not planned for, create a burden on those who are left behind.

Proper estate planning can eliminate or reduce these problems.

Financial Burdens:

1. Estate Settlement costs are too high: These costs consist primarily of probate fees and death taxes.
2. Estate assets are improperly arranged:
   • Liquidity: There is not enough liquid (cash type) assets to pay estate settlement costs.
   • Cash Flow: There is not enough income to care for loved ones left behind; e.g. spouse and minor children.

Transfer of Assets:

1. Estates assets may be subject to probate and expense.
   
2. Assets transferred to minors may be in cumbersome guardianship accounts until they attain age 18 (21 in some states) and are then distributed outright to the children.
   
3. Additional death taxes may be paid because there was no pre-death planning.

Generally, there are three primary ways to pay estate taxes…which are due 9 months from the date of death.

1. The heirs may choose to liquidate estates assets. This often times creates a "forced sale" and assets are sold at discounts, often times far below their
   true value.
2. The heirs may borrow the money to pay the estate tax. When this happens, there is obviously interest to be paid (plus eventually the principal) …thus creating a scenario where the total amount of monies paid often times is 3, 4, or 5 times greater than what the tax bill was.
3. In many cases, it makes sense for a trust to buy a life insurance policy, held outside the estate. Upon death, the trustee simply takes the life insurance proceeds and pays the taxes due …thus allowing the beneficiaries to keep all of the estate assets intact.

Neither Cambridge Investment Research, Inc. nor registered representatives of Stahlschmidt Financial Group provide tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice. Cambridge nor it's affiliates offers tax or legal advice.  Please see your tax or legal consultant for these services.