Legacy Planning for Estate and Gift Taxes | Personal Capital
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Taxes and Your Estate Plan

They say only two things are certain in life: death and taxes. Unfortunately, sometimes the two come hand in hand, especially if you haven’t planned ahead.

Enter taxes – and your estate plan. Currently, the estate tax only impacts those who are leaving behind more than $5.6 million in 2018. This applies to every taxpayer, so conceivably, a married couple can protect $11.2 million from the estate tax. Because of this, most people aren’t affected by the estate tax – but those who are impacted can pay at least a 40% rate. One of the main reasons people create a plan that considers taxes is because the taxes your heirs may end up owing on their inheritance can be a significant burden.

Planning Ahead to Relieve the Tax Burden

Let’s take a quick example: Betsy and Tom own a prosperous farm, and they have four kids. Nearly all of their wealth is tied up in the land they’ve farmed for decades. When they pass away, their four children could be on the hook for the taxes associated with the value of the land – if they don’t plan properly. (Keep in mind, there is an estate tax marital deduction, which allows assets to pass to your spouse without impacting the estate tax exemption, regardless of the size of those assets, so estate taxes usually only come into play after the second spouse passes. At that point, the estate would likely be impacted with a large estate tax.)

So where will Betsy and Tom’s kids get the money to pay the taxes associated with the estate they will pass on to them? Selling the land can be a slow, costly process and the IRS usually wants its cut of the money in nine months or less. Their kids may not have the capital to pay the taxes out of pocket and trying to sell the farm quickly puts pressure on them to accept an under-market value price for the land

Betsy and Tom could, however, help their children absorb some of the tax blow by using foresight and some planning.


If they plan ahead, Betsy and Tom can use life insurance policies to help cover the impact of estate taxes. They can also set up a life insurance trust to be the beneficiary of the policy so that the death benefits won’t be taxed as part of the estate. Both methods help alleviate any kind of tax burden their beneficiaries may be facing in the event they stand to inherit a large estate. (If you use this approach, you will want to know the specific state laws where you live, since some have estate tax provisions that kick in much earlier.)

Estate Taxes & Gift Tax

If you find yourself in a position like Betsy and Tom, there are other ways you may be able to help alleviate the tax burden on your beneficiaries. At the federal level, estate taxes can be intertwined with the gift tax. The latter tax applies to assets transferred to others during your lifetime. Typically any gift above $15,000 (for 2018) begins to count against the gifting individual’s lifetime estate tax exemption of $5.6 million.

This year (2018), the gift tax exclusion allows you to give up to $15,000 per year to any one, to as many people as you’d like. Your spouse can also use this exclusion, and these gifts don’t count against the lifetime gift-tax exclusion for your potential heirs; therefore the annual exclusion associated with the gift tax can help reduce the overall value of an individual’s estate during their lifetime, without impacting the individual’s lifetime estate tax exemption.

Remember, with the current possible legislation changes to tax law – specifically the possible repeal of the estate tax (or an increase in the estate tax exemption amount) – this all may soon change.

Our Take

If this all sounds terribly complex, it’s because it is. That’s why consulting a professional is often a good idea when you’re navigating through the realm of taxes, even if they’re only relevant after you’re gone.

Read our free Legacy Planning Guide to learn more.

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All legacy/estate planning and charitable giving analysis and insight provided is extended to you as a courtesy for educational purposes only. You should not rely on this information as the primary basis of legacy/estate planning and charitable giving decisions. We are not licensed legacy/estate planning and charitable giving professionals. You should consult a qualified licensed professional regarding your specific situation.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Paul is a Certified Financial Planner® and has been with Personal Capital since they first moved to Denver in 2013. With over a decade of industry experience, Paul’s current role as Vice President, Advisory Service at Personal Capital keeps him focused on a team of financial advisors and their clients.
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