It's no secret that April is a month when most Americans taking care of taxes. But when it comes to estate planning, there are many different forms of tax that affect you and your family that are affected by how and if you set up your estate legal plans. The following are a few of the more relevant tax aspects of estate planning:
- Estate Tax. The federal estate tax does not affect as many families as it used to. A few years back, estates valued at more than $600,000 were taxed at rates of up to 55% of the value of the estate at the time of death. For deaths occurring in 2014, more than $5 million of assets are exempt from estate tax at the time of death. And with the new portability provisions and appropriate elections, it's fairly easy for married couples to leave more than $10 million of assets to their heirs free of federal estate tax.
- Income Tax. People these days are forming trusts to solve lots of painful problems. Individuals and couples are forming trusts to: avoid the court-supervised probate process, avoid nursing home confiscation of assets, and generally to avoid government intrusion into your family and financial affairs. Most of these trusts are established in a way that your income taxes are not affected by the formation of these trusts. These trusts are often called, for tax purposes, Grantor Trusts, which means that the trust is ignored for tax purposes, and the person who set up the trust still pays income tax - individually - on the income that the trust assets produce.
- Capital Gains Tax. Many families unknowingly incur large sums of unnecessary capital gains tax because the donate appreciated assets to their family members or children prior to their death, ensuring a "carry-over" basis, and losing the "step-up" in basis that occurs when your heirs inherit appreciated assets. Since the estate tax affects so few, it's often better to keep the assets in your "taxable estate" and ensure the step-up in basis to your heirs when they inherit those assets after your death.
- Property tax. All estate planning and lifetime transfers should not be made without considering the property tax aspects of those transfers.
Don't work with anyone regarding your estate unless they have an excellent working knowledge of the trust code, the Medicaid Eligibility Manual, the probate code, inheritance law, and the applicable state and federal tax codes. A move you make can help in one area but hurt your family in another - don't let that happen to your family.