Attorney
Real estate, valuable collectibles, retirement accounts and other similar assets can be tricky when planning for estate taxes because they are illiquid, meaning they are hard to quickly convert into cash. Getting a handle on estate taxes on these assets is crucial so as to prevent any financial burdens on your heirs.
Horizon Elder Law & Estate Planning has been helping clients in Contra Costa County minimize their tax liabilities for decades. Read here for their tips on how to plan for estate taxes when your estate includes illiquid assets.
What are the Estate Tax Implications?
The complex world of estate taxation can significantly impact your legacy planning, especially when your portfolio contains assets that cannot be readily converted to cash.
- Federal Estate Tax: The federal estate tax exemption for 2024 is $13.61 million per individual. Estates exceeding this threshold are subject to a tax rate of up to 40%.
- State Taxes: California does not have a state estate tax, but federal estate tax laws still apply.
- Illiquid Asset Challenges: Since illiquid assets are not easily converted into cash, heirs may struggle to pay estate taxes without selling the asset or taking on debt.
Getting a Professional Appraisal is a Smart Idea
Illiquid assets require an accurate valuation to determine estate tax liability. Regular appraisals help ensure compliance and provide documentation to support estate tax filings. Additionally, proper valuation can also assist in planning strategies to minimize tax exposure.
Use Life Insurance as a Liquidity Tool
When faced with illiquid assets in your estate, life insurance can serve as a powerful tool to provide immediate liquidity without forcing your heirs to sell valuable family property or investments.
- Consider placing the policy in an Irrevocable Life Insurance Trust (ILIT) to keep proceeds out of the taxable estate.
- Choose a policy value that aligns with estimated estate tax liability.
Trust Strategies for Asset Preservation
Grantor Retained Annuity Trusts, or GRATs, allow you to transfer assets while minimizing gift tax exposure. As the grantor, you retain annuity payments for a fixed term, after which the asset passes to your heirs. Qualified Personal Residence Trusts, or QPRTs, help transfer real estate at a reduced tax value while allowing the grantor to continue living in the property for a predetermined period. Both strategies are beneficial for reducing estate tax liability while preserving family assets.
Utilize Discounting Strategies
Several legal structures exist that can help you reduce the taxable value of illiquid assets, creating savings for your beneficiaries.
- Family Limited Partnerships (FLPs) and Limited Liability Companies (LLCs) enable partial ownership transfers at discounted values.
- Minority Interest and Lack of Marketability Discounts can lower estate tax obligations by reducing the appraised value of illiquid assets.
- Be aware that proper structuring and legal documentation are essential to meet IRS guidelines.
Consider Charitable Giving
Charitable strategies can help balance philanthropic goals with tax efficiency for your overall estate plan.
- Charitable Remainder Trusts, or CRTs, allow illiquid assets to be placed in a trust, providing income to beneficiaries and a tax deduction.
- Donor-advised funds, or DAFs, enable phased charitable contributions, reducing taxable estate size.
Leverage Installment Payments & Deferral Options
For estates with closely held businesses, IRC Section 6166 allows estate taxes to be paid over 14 years, easing liquidity strain. Private lending or loans from estate funds can help heirs manage tax payments without asset liquidation. These installment strategies work best when planned well in advance with professional guidance to ensure proper implementation.
Take Action Now to Protect Your Legacy
Planning for estate taxes on illiquid assets requires careful consideration and professional guidance. Don’t leave your loved ones facing difficult financial decisions during an already challenging time.
Contact Horizon Elder Law & Estate Planning today for a personalized consultation to discuss how these strategies might apply to your unique situation. Our experienced team in California can help you develop a comprehensive estate plan that protects your assets and provides peace of mind for you and your family.