Last week we talked about capital gains taxes, today I want to talk about the payment options available to actually PAY for those taxes. So, your loved ones are faced with a large tax bill at your death, there are only a few ways that they can fund these amounts:
The most obvious method of paying taxes owed on death is by using cash from the estate to pay the capital gains taxes. This means that you’ll use dollar for dollar to fund the tax bill and this, of course, reduces the net estate value.
If there isn’t a sufficient amount of liquid cash/assets, you can borrow the funds to pay the taxes owed on death. This is a more expensive method because not only will you have to pay the full amount back, you will also have to pay the interest accrued on the loan. This can become a lengthy and costly way of paying taxes, but without proper planning, this may be the only option available at the time.
Another option would be to sell assets to pay the taxes owed. You may sell the assets that the taxes are owed on, or other assets of the estate. This method also reduces the net estate value and leaves your beneficiaries with less after the taxes are paid. Other important things to consider with this option is do you have the ability to see certain assets at the time, what will happen if you are not able to sell certain property. What is the value of the property at the time the sale needs to made. You may be in a situation where the sale must happen, and may attract a lower sale price because the buyers know the urgency, this is called a fire sale.
This is usually the most cost-effective way to fund a tax bill on death. With proper planning, your accountant can assist with estimating the taxes that will be owed at death. Purchasing a permanent life insurance policy while you are living will provide your loved ones with a tax-free, lump-sum death benefit, the proceeds can be used to pay taxes owed, and the assets can pass to your beneficiaries without reducing the net value of your estate. The total premiums paid for the life insurance policy will be less than the total death benefit, which means the total amount you paid in taxes was significantly less than what was owed, since you only paid for the premiums. Insurance does depend on things like your age and health, so make sure you plan ahead so you can get ahead.
Many people would like to keep certain assets and property in their family, things like keeping a family cottage, or continuing to generate rental income for your family. With proper planning and advice, you can ensure that your wishes and assets you want to pass on to your beneficiaries can go according to your plans.