While working on your estate plan, something you need to consider is the taxes that may or may not need to be paid. You may have a goal to pass on a certain inheritance to each child or loved one you leave behind, but the legacy you intend to leave may not be as grand as expected after taxes come into play.
What’s interesting about taxes is that they are highly individualized. For example, if you leave the same amount of money to two children but one lives in poverty while the other is extremely wealthy, they may pay different taxes on what they inherit.
That’s not to mention that there could be a possibility of avoiding taxes altogether if you plan correctly.
How can you maximize the inheritances you leave behind for your children?
To maximize your children’s inheritances despite having to be taxed, it’s important to first consider your children’s individual tax situations. You may decide to leave a different amount to each child because taxes affect each of them at a different level. After taxes, the varied amounts you left may work out to be the same in their pockets, which could be your goal.
Another option may be to convert your assets now so that you pay taxes during your lifetime. For example, if you have a traditional IRA account, you may switch it over to a Roth IRA. You’ll be taxed, but your beneficiaries won’t have to pay taxes when they inherit what remains in the future. Even if that Roth IRA grows, it can still be distributed without any income taxes required.
Plan ahead to tackle tax issues in your estate plan
As you can see from the few scenarios above, the way you handle your estate’s taxes will have an impact on your children or other beneficiaries. To minimize the impact, it is worth you talking about the best ways to distribute property, the potential of using trusts and other ways that you may limit taxation overall. Doing this now will help resolve tax issues before they become a problem for your beneficiaries.