Three Ways Taxes Factor Into Estate Planning

Posted on: 12 July 2023

When working with an estate planning lawyer to prepare your legacy, you'll want to keep an eye on tax issues. Taxes may affect an estate on many fronts, but these three are among the most important.

Capital Gains

Invested capital is taxable, but only when you realize a tax event. When you sell stock outside of a retirement account, for example, that's taxable. Transferring assets through an estate to a beneficiary may also trigger a tax event if it leads to a sale.

With proper planning, though, you can avoid or mitigate the taxes in some scenarios. Transfers to spouses usually don't realize tax events because the assets are common property. You may also transfer some assets on a stepped-up cost basis. This doesn't prevent the tax event if the recipient does sell, but it does reduce the basis costs. You may have other options, but you should discuss them with an estate planning attorney before trying them.

Income Taxes

A person's outstanding income taxes don't go away when they pass. Consequently, you need to fund your estate with enough money to settle the outstanding taxes. Also, you need to empower the executor to spend the funds for tax payments.

If your estate fails to pay any outstanding tax bills, the government can demand payment. The government has options through the probate court. In extreme cases, the government can even force an estate into bankruptcy to settle tax bills. For the sake of the estate's beneficiaries, you want to limit this risk as much as possible.

Estate Taxes

You may find it strange that this issue is down the list. However, inheritance or estate taxes affect very few people at the federal level. As of 2023, the law excludes assets up to $12.92 million from the estate tax.

Some state laws may apply, though. You should consult with an estate planning attorney who lives in your state. They can tell you how state laws might affect your estate and its beneficiaries.

There are many ways to ensure that you don't exceed the exclusion threshold. Gift-giving during your lifetime can reduce the remaining assets. Well-organized trusts also can distribute proceeds without running afoul of inheritance tax laws. Charitable donations can keep an estate below the threshold too. If you're concerned that your estate might pass the threshold, you should discuss the situation with an accountant and an estate planning attorney.

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