Certain states levy an inheritance tax.
Death does not exempt your money from taxes.
In fact, it can trigger taxes.
States with inheritances taxes can make estate planning and administration more complicated.
If you live in one of these states, to include our neighboring states of Nebraska and Iowa, then you will want to consider this in your estate planning.
According to a recent nj.com article titled “How can I be sure the inheritance tax is paid when I die?,” failing to do so can leave a big mess for your executor.
Without proper planning, the executor may not have money set aside for the inheritance tax payment.
What can you do?
One option is to remove the beneficiary designations from you financial accounts.
How might this help?
Instead of passing directly to the beneficiaries, the money will pass through probate.
The funds will be distributed to heirs based on instructions on your last will and testament.
Because these assets are a part of your estate, the executor will be able to withhold the amount necessary to pay any inheritance tax on the distributions before distributing what is left over.
Does distributing assets through probate rather than through a beneficiary designation trigger higher inheritance taxes?
Except for life insurance, the amount of tax owed by the beneficiary is the same for both.
Is this a solution for every account or situation?
Using this method with a retirement account may shorten the payout period and trigger unpleasant consequences.
Discuss your situation with an experienced estate planning attorney to create a plan to meet your specific needs and goals.
Reference: nj.com (May 5, 2020) “How can I be sure the inheritance tax is paid when I die?”