If you have three children, shouldn’t you give them the same amount of inheritance? Isn’t that fair? If you take a closer look at your estate plan, it might be just the opposite.
Why is equitable better than equal?
One of the biggest complicating factors in estate planning is taxes. Without careful planning, taxes can eat up a third, if not half of your assets. Unless your beneficiaries are in the exact same financial situation, they will end up with different inheritances after taxes.
To avoid unnecessary expenses and increase the amount your beneficiaries receive, you may need the help of a financial adviser and an honest conversation with your beneficiaries. Through careful planning, you can leave your beneficiaries an equitable, not an equal inheritance.
In situations where one beneficiary has a significantly higher income than another, the “equal” inheritance taxes will cost the lower-earning beneficiary more. Instead, you can approach estate planning creatively. Although the numbers look different at the start, in the end it will be fairer.
What are strategies to maximize after-tax inheritances?
The most important step is to ask your beneficiaries their tax margin. If that margin changes, you may need to update your estate plan. With their tax margin, you can identify strategies that most benefit their individual situation. This includes:
- Leave assets that are directly taxable to a beneficiary in a high tax margin.
- Leave blended IRA assets and taxable assets to a beneficiary in a middle tax margin.
- Leave IRA assets and other tax-deferred inheritances to a beneficiary in a lower tax margin.
Of course, these are just a few of the many strategies you and a financial adviser can use. If your goal is to have your beneficiaries inherit roughly equal amounts after taxes, this could help you achieve that goal. With honesty and open communication, you can help your beneficiaries, no matter their situation.
