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Monday, May 16, 2022

Taxes Relevant to Estate Planning

Taxes are rarely anyone’s favorite subject. With tax season just wrapping up, you may have had your fill of the topic for a while. Regardless, however, taxes remain an important thing to confront. This may be especially true in the estate planning context. After all, estate planning is about a lot of things, but one of its main purposes is to put tools in place to facilitate the most effective transfer of assets and wealth from a one person to their intended beneficiaries. This may happen before death, upon death, or at some point in time after death. In any event, considering the potential tax implications of such transfers can be critical to maximizing the effectiveness of the transfer. Taxes can, of course, end up taking a significant chunk of an estate’s value. Fortunately, if you think ahead and put plans in place accordingly, you can minimize the potential tax liability of your estate and your beneficiaries.

Taxes Relevant to Estate Planning

First and foremost, the federal estate tax should be considered when estate planning. For estates that exceed the exclusion amount, a tax rate of 40% is assessed on the estate value that falls above and beyond the federal exemption. The current exemption sits at $10 million, but this is set to expire in 2025 and revert back to the previous $5 million federal exemption amount. If your estate exceeds either of these amounts or may even come close to these exemption amounts, putting plans in place now may be key in avoiding what could be significant tax liability for your estate.

Income tax, while it may not be one of the first things you consider when estate planning, can also be very relevant to the estate planning process. For any of us with taxable income, filing annual federal, and sometimes state, income tax returns is something we do each year. Estate and trusts that have closed and distributed assets also have to file annual tax returns if there is taxable income. Furthermore, heirs of an estate and beneficiaries of a trust may also have to report income if they received income distributions prior to the closing of the estate or trust.

It may also be a sound plan to consider capital gains income tax liability in your estate plan. Capital gains can come into play due to an asset’s income tax basis. When a person dies, the income tax basis of the assets is set to fair market value at the date of death. Because of this, it is usually best for assets to remain in a trust or under original ownership until death. This is because the property can then be sold with minimal capital gains tax liability. Most would be wise, therefore, to avoid transferring certain assets to loved ones prior to passing away. Waiting to transfer assets upon death or after death is likely to help in tax liability avoidance by increasing the tax basis and avoiding capital gains on the sale of the assets.

Estate Planning Attorney

You may know the importance of tax considerations in estate planning, but need help planning accordingly. You can count on the estate planning team at Monk Law to help you develop an estate plan that will protect the value of your legacy by planning to minimize tax consequences. Contact Monk Law today.


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