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Taxes could ruin your legacy if you lack the right financial plan

by Susan Wright | Contributor
July 9, 2020


One of the key components of your overall financial plan is a strategy for how you will transfer assets. That is because without a viable plan in place, Uncle Sam could end up being the primary recipient of everything you’ve worked so hard for.

While many people do not like to dwell on the idea that someday they will be gone, the reality is that there is no way to control the passage of time. There are, however, asset transfer strategies you can put in place now in order to ensure that your hard-earned savings can continue to benefit those you love.

What type of taxes could your assets be subject to?

Although your intention may be to transfer various assets to your children, grandchildren, and/or other loved ones, the value of these could be significantly diminished if you don’t have a way to reduce or eliminate taxation.

There are actually four types of taxes that your assets – and in turn, your survivors – may be subject to when the time comes. These could include:

  • Gift tax
  • Income tax
  • Inheritance tax
  • Estate tax

Gift tax: The gift tax is defined as a federal tax that is applied to an individual who gives anything of value to another person. According to the IRS, in order for an asset to be considered a gift, the recipient cannot pay the giver full value for the item. It is the giver of a gift who is required to pay any of the federal gift taxes that are due.

Federal Estate Tax Rates in 2020

Individuals and married couples are allowed to gift away a certain amount of assets every year to as many individuals that they wish, without having to pay gift taxes. In 2020, the annual gift tax exclusion is $15,000, meaning that a couple can gift away up to $30,000 free of gift tax.

Income tax: As its name implies, income tax is levied on income that is generated by an individual and/or a business. Income taxes make up a significant portion of the U.S. government’s revenue. These funds are often used for paying various government obligations, as well as for providing goods to citizens.

When an individual passes away, their estate becomes a new tax-paying entity. In this case, any taxes that are due on the decedent’s income will be levied either via the deceased person’s final tax return, on the tax return of the estate, or on the tax return of the beneficiary who acquires the right to receive the income.

Inheritance tax: Certain states will impose an inheritance tax on those who inherit assets from a deceased person’s estate. The tax rate of the inheritance tax can depend on several factors, such as the:

  • State of residence
  • Value of the inheritance
  • Relationship of the beneficiary to the deceased individual

Estate tax: Estate taxes can be levied on a deceased individual’s assets if the amount exceeds a certain limit that is set by the government. For instance, in 2020, the federal estate tax exclusion is $11.58 million.

Although estate taxes don’t apply to everyone, if your survivors owe, it could have a significant effect on the amount that goes to them – regardless of how well your assets and investments have performed throughout the years.

As an example, if an estate is valued at $15 million (in 2020) and the decedent’s survivors are subject to federal estate taxes, within just one day, the value of the estate could drop to just over $9 million.

So, having a tax-saving plan in place could literally be worth millions to your immediate survivors, and possibly even for generations to come, essentially keeping your legacy intact.

Is it better for your loved ones to inherit or receive assets as a gift?

In some situations, it is better for survivors to inherit assets after the giver passes away. But just the opposite can also be true. For example, when making a non-cash gift such as stocks, a home, or even a business, the recipient of that gift will assume the giver’s cost basis in the asset if it is inherited. But this is not the case if the asset/gift is received while the giver is still alive.

In the latter case, when the recipient goes to sell that asset, the amount of taxable gain (assuming that the asset increases in value) will be more than if the asset were inherited. If, however, these assets are inherited, the cost basis of the receiver is the amount that the asset is valued at when the giver of the gift passes away.

For instance, if an individual purchases shares of ABC Company’s stock for $10,000 and the shares are valued at $20,000 when he or she dies, the recipient’s cost basis would be $20,000. If the shares continue to rise, and are valued at $30,000 when the recipient sells them, the taxable gain will be figured at $10,000.

However, if the shares are inherited prior to the death of the gift giver, the recipient’s tax basis would be $10,000. So, if the recipient sells the stock in the future when it is valued at $30,000, he or she will owe more in tax.

With that in mind, planning ahead can make a big difference in the amount of assets – and ultimately, your legacy – that is retained by those you care about.

Are you ready to reduce – or even eliminate – taxes on your legacy?

Reducing or eliminating taxes can be somewhat tricky – particularly after an individual has passed away. So, having a good solid plan in place can help to keep more in the pockets of your loved ones, and out of Uncle Sam’s. It can also alleviate a great deal of financial-related stress on those you care about during an already difficult time in their lives.

Alliance America can help

Alliance America is an insurance and financial services company. Our financial professionals can assist you in maximizing your retirement resources and achieving your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling 833-219-6884 today.


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