What is Inheritance Tax Planning?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 08 November 2018
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The process of inheritance tax planning is a strategy designed on minimizing the amount of inheritance taxes that heirs must pay on any assets inherited from a deceased loved one. In making use of effective and legal means of lessening the tax burden associated with the inheritance, it is possible to use inheritance tax planning as a means of insuring that beneficiaries do not encounter temporary periods of financial hardship as a result of the inheritance.

In order to address the issue of possible tax burdens that must be paid by heirs, it is important to know what type of assets are subject to taxation. While the list of assets may vary based on the country of origin, there are a few examples that are subject to taxes just about everywhere. This list includes any real estate holdings such as homes, apartment buildings or office buildings. Cash disbursements are almost always taxable. Also included are lump sum payments that are made from pensions or retirement plans as a result of the death. Even life insurance payments may be subject to taxation.


Once it is determined which types of assets are subject to taxes of some type, the next step in effective inheritance tax planning is to identify any allowances that may be associated with a given asset. For example, the beneficiary may be allowed to receive a certain amount of cash from an inheritance without taxes being applied. This amount can usually be deducted from the total amount received. In like manner, some countries also provide tax breaks on a percentage of property inheritances if the property is used for specific purposes, such as agriculture or as a public business. There is even the chance that the beneficiary would incur a smaller tax burden if he or she was a resident of the inherited home for a period of time prior to the death of the loved one and has no other permanent residence.

After there is a clear understanding of what type of assets are subject to taxes and what types of allowances may apply, the process of inheritance tax planning involves arranging the estate in a manner that will create the least tax burden for the beneficiaries. This can sometimes be arranged by setting up trusts instead of issuing cash disbursements, or establishing family corporations that can ensure the beneficiaries receive a portion of the inheritance over a period of time.

In most cases, it is a good idea to secure the services of a legal counsel and financial planners who can assess the estate, and determine the most efficient way to legally ease the tax burden for all heirs. Since tax laws are subject to change over time and vary from one jurisdiction to another, it is a sound practice in inheritance tax planning to review the current structure from time to time and make any changes required to keep the plan in accordance with current laws and regulations.



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