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Consider the tax obligations of your heirs when leaving assets

On Behalf of | Apr 17, 2019 | Wills & Trusts

As a parent, you likely love all your children equally and want that to be reflected in their inheritances. After all, one of the biggest fears that most people have when estate planning is unintentionally creating family conflict. Passing along assets in unequal measure can seem like favoritism, which can stir resentment.

That being said, inheritance amounts that are equal at the beginning may not be equal once they are passed to your intended heirs. If you fail to account for factors such as tax liabilities, your heirs could be inheriting unequal amounts and paying far more in taxes than necessary.

This problem was discussed in a recent news article. The author notes that you need to account for the tax liabilities of the assets you are bequeathing as well as the tax obligations of your heirs. When passing on assets from an IRA, for example, you need to remember that it is a tax-deferred account, meaning that your beneficiaries will pay taxes on the assets whenever distributions occur. It might be better to leave these assets to children who have a much lower overall tax rate than their siblings.

Conversely, for children in a higher tax bracket, you may want to prioritize assets that have already been taxed or are taxed annually on dividends and interest. This will minimize their tax obligations and ensure that more of your assets are passed along.

Working With A Lawyer And Communicating With Heirs

It may seem counterintuitive, but the best way to leave your children (or other heirs) relatively equal inheritances may be to start with unequal amounts that are strategically balanced based on tax obligations and other factors. The best way to accomplish this is to work with an experienced estate planning attorney who can guide you through the process.

Finally, you’ll want to communicate with your heirs about your financial decisions and explain that an unequal share of inheritance (on the front end) is meant to result in an equitable distribution among all beneficiaries. By planning ahead and communicating with your loved ones, you can intelligently plan your estate and minimize the risk of family conflict.


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