The language of estate planning can be confusing for those just getting started with their planning. There is so much terminology, so many acronyms, and important concepts to remember. People may wonder what’s the most important? What will be the most relevant to my needs? While most people are being guided by an estate planning attorney throughout the process, having a basic working knowledge of commonly discussed but little understood areas of estate planning can prove helpful. The estate tax, for example, is frequently mentioned but little understood. In fact, because of the popular idiom “Death and Taxes,” there are a number of incorrect assumptions. Below, several common estate tax myths are debunked.
The estate tax is the same thing as the “death tax”
This is false. Although every person technically has an estate, even if modest, not every person will be responsible for an estate tax after death. The estate tax is only owed by individuals whose estates have a value of over USD $5.4 million, or married couples with estates over USD $10.8 million.
Most small businesses will be forced to liquidate to pay estate taxes
Bearing in mind the falsehood of the previous myth, only a few small businesses will owe any estate tax, and the majority would not need to be liquidated to pay any tax. For larger businesses that are included in a taxable estate, the Trustee of the estate can elect what is known as a “6166 election”, which will essentially create a loan with the IRS so that the estate taxes can be paid over time and the business can avoid liquidation.
Your Future Heirs Will Be Required to Pay Off Any Remaining Debt
Not true! If large debts are left behind to creditors, your estate itself would pay off the remaining balances—not inheritors individually. It’s possible there could be a court order to liquidate assets (such as real property) to pay off any large loan balances, but, beneficiaries themselves wouldn’t have to pay off debt.
Taking the time to educate yourself on the estate tax and other areas of estate planning can help mitigate stress and overwhelm when working with an estate planning attorney.