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Estate Planning: Solving Estate Liquidity Challenges

Estate planning, while an important part of financial management, has many challenges. One such challenge is dealing with estate liquidity.

When someone passes away, their assets and the taxes owed on those assets (estate taxes) become the responsibility of the estate’s heirs. The type of assets can make this a complex challenge.

Different Assets, Different Challenges

People leave behind various types of assets. Some might have liquid assets like cash in bank accounts or investments in stocks and bonds. These assets can be quickly and easily converted to cash, simplifying the process of paying estate taxes. However, others might own less liquid assets, such as a large farm or a substantial business interest, built up over a lifetime.

While these assets are valuable, they aren't easily converted into cash. When estate taxes are due on these high-value assets, heirs may find themselves in a bind, lacking the necessary liquidity.

Strategies to Overcome Liquidity Issues

Fortunately, there are strategies to address these challenges:

Life Insurance in an Irrevocable Trust

A practical approach is purchasing life insurance and placing it in an irrevocable life insurance trust. This method ensures that there is sufficient liquidity to cover estate taxes, providing much-needed relief to the heirs.

IRS Deferment Options

The IRS offers opportunities to defer estate taxes on certain business assets, provided specific criteria are met. This deferment allows taxes to be paid at a later date, easing the immediate financial burden on the estate and its heirs.

Borrowing Strategy

Estates can also borrow money to pay estate taxes. A unique aspect of this strategy is the ability to deduct the interest on the loan, including future payments, thus reducing the overall estate value that is subject to tax.

Effective estate planning, particularly for those with illiquid estates, requires a careful balance between preserving asset value and meeting tax obligations. By employing methods like life insurance trusts, leveraging IRS deferment opportunities, and considering borrowing options, it's possible to efficiently manage estate taxes.

These strategies not only provide financial relief and flexibility but also ensure a smoother transition of assets to the next generation.

If you have questions or would like to learn about estate planning strategies, please contact Richard Kollauf, a Principal at SVA Certified Public Accountants.

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Biz Tip Topic Expert: Richard Kollauf - JD, CPA, CFP, AEP

Richard Kollauf - JD, CPA, CFP, AEP

Richard is a Principal for SVA Certified Public Accountants and has more than 35 years of experience working in financial, accounting, and legal operations. Richard’s expertise in the multi-faceted financial environment includes business succession planning, tax, investments, finance, mergers and acquisitions, estate planning, and trust administration. He also has experience in estate planning and distribution for complex operational and investment multi-state businesses. Richard provides income tax consulting services to closely-held and family-owned businesses, as well as high net worth individuals.

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