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Wealth Plans Checklist Series: Estate Tax & Liquidity Plan

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Purpose

In general, a wealth transfer tax is a tax imposed on the transfer of wealth (or property), either in the form of a gift made during life or as a bequest at death.  There are three types of wealth transfer taxes:  the gift tax, the estate tax, and the generation-skipping transfer tax (commonly called the GST tax).  Current law allows an exemption per individual of $11.58 million in 2020, increasing to $11.7 million in 2021.[1]  This means you can give away up to $11.7 million of your property on a tax-free basis.  However, once you’ve hit that amount, then a 40% tax rate applies to any additional transfers thereafter.[2]  If the transfer is made during life then a gift tax (and/or a GST tax if applicable) will be due.[3]  if the transfer is made at death then an estate tax (and/or a GST tax if applicable) will be due.[4]

For those individuals and families who will ultimately pay an estate tax at death, a second less thought about but equally important question is: Will there be enough cash (or cash equivalents) for the estate to pay Uncle Same when it comes due?  No matter your situation, if an estate tax is owing, the due date for payment of the estate tax is nine months from the date of death of the decedent.  The IRS expects to be paid at this time and it expects to be paid in cash.  If the majority of your assets are illiquid (not easily convertible to cash) then your estate may face a forced sale of valuable assets at a substantial discount just to raise the cash needed within the time frame to make the tax payment.  The purpose for having an estate tax and liquidity plan is to avoid this nightmare scenario.


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