Hyden, Miron & Foster, PLLC Law Blog

Saturday, May 21, 2022

Taxes and Estate Planning

Taxes may not be your favorite topic. In fact, taxes may be far from your favorite topic. After all, taxes can be costly, complicated, and an overall headache. The fact is, however, that taxes are a reality of life and also of death. Taxes can have a big impact on your estate plans and the amount of an inheritance you are able to effectively transfer to your heirs. Fortunately, learning about these taxes and finding out more about the estate planning tools you can put in place to help avoid or minimize your estate’s tax liability and that of your heirs can greatly help matters.

Taxes and Estate Planning

Before executing any estate plan, it is prudent to consider the potential tax consequences of said plans. After all, estate planning often involves transferring ownership of assets, both monetary and other property, or plans for such transfers in the future. Transfer of assets can have big tax consequences. In fact, taxes can end up taking a big chunk out of your estate’s value without the proper plans put in place.

Income tax, for instance, may not be a tax you’d associate with estate planning, but it is relevant, nonetheless. Estates of a deceased individual must file annual tax returns if there is taxable income generated up until the estate is closed and assets are distributed to heirs and beneficiaries of the estate. Additionally, heirs of the estate may have to report income they receive from the estate if there are any income distributions prior to the estate’s closing.

In line with the income tax consideration is the potential capital gains income tax liability that can come into play in estate planning. Upon a person’s death, the basis of assets owned by the decedent increase to fair market value as it sits at the person’s time of death. Because of this, it is generally best for an asset to stay in a trust arrangement so that it can avoid or minimize capital gains tax liability when sold. This is important to remember as far too many people may be tempted to transfer assets to their heirs and beneficiaries prior to passing away. This, however, can end up landing beneficiaries with a low tax basis and increased capital gains liability upon sale of the asset.

You will also, of course, want to be mindful of the federal estate tax when creating your estate plan. After all, federal estate taxes are assessed at the staggering rate of 40%. This means that a 40% tax rate will be assessed on any assets in a person’s estate over and above the federal exemption amount. The exemption amount currently rests at $10 million dollars, but is set to revert back to $5 million in 2025. If your estate’s value rests closer to the lower exemption amount, it would still be prudent to make plans to help minimize estate tax liability. Congress is tasked with estate plan taxes and few of us really know how things will change over the ups and downs of the political arena.

Estate Planning Attorneys

For sound estate planning counsel that takes into consideration tax liability, you can count on the team at Hyden, Miron & Foster. Contact us today.

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