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Sunday, June 5, 2022

Taxes that Can Impact Estate Planning

One of the benefits of planning ahead is the ability to anticipate certain consequences and put tools in place to avoid them accordingly. Estate planning, for instance, often involves significant transfers of asset ownership, all of which can have profound tax consequences. Tax liability can take a big chunk of the value away from the assets you wish to transfer and, thus, it is important to be aware of what taxes may come into play in the estate planning realm. This will help you put plans in place to minimize potential tax liabilities for both you and your heirs.

Taxes that Can Impact Estate Planning

The first kind of tax that may come to mind when thinking about estate planning is, of course, the estate tax. The federal estate tax often makes the news when it is at the forefront of an administration’s political agenda. Many people closely follow what is happening in estate planning legislation for the sole fact that it can have a big effect on the value of a person’s estate that will end up in the hands of heirs as opposed to going towards paying a big tax bill. After all, did you know that federal estate taxes are assessed at a rate of 40%? This means that all assets that are owned at the date of death that fall above the federal exclusion amount will be taxed at that 40% rate.

Right now, the federal exclusion amount for the federal estate tax is $10 million, but that is set to expire in 2025 and the exclusion would then drop to $5 million. To be safe, estate that approach either of these marks should put plans in place now to avoid or minimize big tax consequences for their estate. A 40% tax rate means that much of an estate’s value could end up going to taxes instead of being transferred to estate beneficiaries without the proper plans in place to avoid such tax consequences.

In addition to estate taxes, income tax consequences should also be considered when estate planning. Estates have to file annual income tax returns if there is taxable income until the estate is closed and so do trusts. Furthermore, heirs and beneficiaries may also have to report income received from a trust or estate if distributions are made to them prior to the trust or estate’s closing.

Capital gains taxes, in particular, should be taken into account when estate planning. Upon a person’s death, the tax basis of an asset becomes its fair market value at the date of death. This means that, from a capital gains perspective, it is usually better for an asset to be owned by a person until death. This way, it can be sold later with minimal capital gains tax consequences. While often people choose to transfer assets prior to death, this arrangement should be reconsidered in light of potential capital gains tax liabilities that could eat away at the asset’s value.

Estate Planning Attorney

For a comprehensive estate plan designed with the best interest of you and your loved ones in mind, reach out to the estate planning team at Verras Law. Contact Verras Law today.


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