The costs associated with estate settlement include funeral expenses, medical bills, legal fees, administration costs, and other debts, as well as various federal or state taxes. These costs can drastically shrink the size of any estate. Because these costs must be paid before the estate can be fully settled, they can also delay distribution of your remaining assets to heirs.
The Need for Estate Liquidity
Estates are often cash poor. Unless sufficient liquidity has been provided, the forced sale of non-liquid assets to pay settlements costs can compound estate shrinkage. In these situations, the buyer generally has a distinct advantage. But, even people of modest means who never considered themselves rich enough to need much estate planning can be in for a shock. In addition to having to settle up with Uncle Sam and state tax collectors, the heirs to even small estates must settle with creditors before they can receive their inheritances.
A False Sense of Security about Estate Taxes
Part of the problem may be that people are so concerned about reducing their income taxes that they forget that the federal estate tax rate is virtually double the income tax rate. Actually, anyone with over a certain amount in assets has a potential federal estate tax liability and may also face state death taxes. Federal estate tax laws, particularly the unlimited marital deduction, have lulled many taxpayers into a false sense of security. Even with a will, anyone who thinks "leaving it all to my spouse" is the way to avoid estate taxes and other estate settlement hassles needs to think again.
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