Estate planning attorney sitting with a client going over tax documents

Taxes to Consider When Estate Planning

If you have started thinking about estate planning, congratulations are in order. You have taken an important step to protecting a future you want for yourself and your loved ones. Estate planning is a multifaceted operation. It involves a lot of different considerations and pinning down many moving parts. With all this going on, things may be lost in the shuffle. Don’t let tax considerations be one of these things. Taxes can have a substantial impact on your ability to transfer assets via your estate plan as tax liabilities can take a chunk of these assets’ value and increase tax liabilities of your heirs and estate. Here are some taxes to consider when estate planning.

Taxes to Consider When Estate Planning

One of the biggest taxes to consider when estate planning will be, of course, the federal estate tax. After all the current federal estate tax sits at 40%. That means that 40% of your estate’s value that exceed the federal exemption amount will be subject to a 40% tax rate! This means that your estate tax bill could be a lot, to say the least. Of course, the current federal estate tax exemption is $10 million, but that is set to expire in 2025 and revert back to a $5 million exemption rate. Many Americans may not have estates at these levels, but many will or many will come close. If you are in the latter camp, take steps to minimize the tax liability of your estate. There are estate planning tools, such as some trusts, that can help you with this.

Income tax will be another big tax consideration to account for when estate planning. While all taxpayers are required to file an annual federal income tax return if they have taxable income, you may not be aware that estates also file income tax returns if taxable income was generated prior to the estate closing and assets being distributed. Additionally, heirs of an estate may have to report income received from an estate on their individual tax returns.

Even more specific than income tax is capital gains tax liability as an important factor in the estate planning process. Did you know that upon a person’s death, the tax basis of the person’s property and assets increases to fair market value as of the date of death? It’s true and it’s an important truth to keep in mind. Many people may consider making lifetime transfers of property to those individuals who they would otherwise leave the property to as an inheritance. This, however, can be an expensive tax trap to fall into. A lifetime transfer can leave a loved one with a low tax basis and lead to significant capital gains tax liability upon a sale of the asset. An asset left upon a person’s death, however, means that the heir can potentially sell the asset with little to no capital gains liability.

Estate Planning Attorneys

Don’t worry. You don’t have to estate plan on your own. The team at Jones, Gregg, Creehan & Gerace is here to assist you and counsel you through the complexities of this important process. Contact us today.