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Estate Planning

At a person's demise there are certain problems which can create a burden on those left behind. Typical financial burdens include probate court fees, death taxes, liquidity and cash flow. The care of minors is also an issue that needs to be planned for properly. Parents should nominate a guardian to care for their minor children, as well as a manager of the assets left for the minors. Proper estate planning can eliminate or reduce these problems.

You should have your team of consultants work in conjunction to help solve your estate planning dilemma. This typically includes an estate attorney, a life insurance agent, and an accountant. They will help analyze your situation by compiling information on your assets and liabilities, your desired heirs, and certain other goals and objectives.

How are death taxes paid?

There are several methods which an estate can use to pay the death taxes. The executor can borrow the cash. This of course only defers the problem. The taxpayer may pay in cash. Of course, people rarely accumulate large sums of cash. Even if the taxpayer has accumulated this large amount of cash, they will have to forego other profitable investment opportunities. The taxpayer can also liquidate current investments. But what if the market is "down" and they don't want to sell their positions? Also, selling investments that have substantial growth might make the taxpayer subject to other taxes such as capital gains, or income tax. The executor may also liquidate other assets. Real estate or other assets can be liquidated, however they may be sold at a financial loss, or the asset may have sentimental value to the heirs. The final way to fund the estate tax bill is from life insurance proceeds. This is the generally preferred way to pay for death taxes for several reasons: the heirs almost always get back more than was paid in; the proceeds may be free of estate taxation; it avoids many problems of liquidating current assets; the proceeds are usually not subject to probate; life insurance is not subject to income tax for beneficiaries; the payment benefit is prompt; life insurance provides cash for a predictable need which will arise at some unpredictable moment.

What are some examples of good and bad estate planning decisions?

When John D. Rockefeller, Senior died he had a gross estate of $26,905,182. He did not implement some basic estate planning tactics and his heirs wound up paying over $17,000,000 in estate taxes. This works out to roughly 64% of his entire estate.

It seems that Mr. Rockefeller's son learned from his father's mistakes. He planned properly and when John Jr. died he left behind an estate of $160,598,584. Because John Jr. had the proper estate planning team assembled, he owed a tax of only $24,965,954. This breaks down to only a 16% taxation rate.

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