Taxes in Estate Planning

By Chris Tymchuck
Founding Attorney

Have you ever heard of the federal estate tax? For those estates that fall over the federal estate tax exemption amount, the excess can be taxed at a rate upwards of 40%. The current exemption amount sits just about $12 million and is set to drop by around 50% in 2025, depending on what politicians end up doing or not doing with it. The fact of the matter is that taxes can have a profound impact on the value of an estate that ends up being transferred to heirs and beneficiaries. It’s not just the federal estate tax that can come into play. Other taxes can have notable consequences for a testator and their heirs. With proper estate planning tools put in place, many tax consequences can be avoided or, at least, minimized. You first, however, need to know what other taxes to consider during the estate planning process.

Taxes in Estate Planning

Income taxes can play a big role in effective estate planning. After all, estates and trusts of deceased individuals must file annual federal and state, if applicable, tax returns if taxable income is generated prior to the trust or estate’s closure and asset distribution. Additionally, heirs of an estate and beneficiaries of trusts must report income received from the estate or trust if distributions were made prior to closing.

When talking about income tax considerations in estate planning, we would be remiss not to mention capital gains income taxes in particular. Capital gains taxes can end up reducing the overall value of an asset substantially if not properly accounted for. If you consider the asset’s income tax basis and plan accordingly, however, you can avoid or minimize tax liability.

You see, the tax basis of an asset, upon a person’s death, is marked as its fair market value as of the date of death. This means that, generally speaking, an asset should remain in a person’s ownership or a trust until that person passes away. Once that asset is transferred after the person’s death, it can then be sold with what will likely be little to no capital gains tax responsibility.

Unfortunately, many people do not consider capital gains tax liability when planning for the transfer of assets. In fact, many choose to transfer assets to people while they are still alive. Therefore, the asset has a low tax basis and is likely to result in capital gains tax liability upon its sale.

In addition to the estate tax and income tax, property tax should also be a consideration when estate planning. It is likely that real estate will be part of an estate and, if it is, it may very well be the largest asset of the estate. Property taxes can be extremely complex and vary from state to state. Be sure to consult an estate planning attorney prior to transferring any real estate to learn about any potential tax consequences of such a transfer.

Minnesota Estate Planning Attorney

Do you have estate planning questions? At Unique Estate Law, we have answers. Contact us today. From within Hennepin County Unique Estate Law represents clients throughout Minnesota, including Minneapolis, Bloomington, St. Louis Park, Minnetonka, Wayzata, Chanhassen, and Excelsior.

About the Author
As a Minneapolis Estate Planning and Probate attorney I help build and protect families through the adoption, estate planning, and probate processes. I also have experience working with families on issues related to their small businesses. I know how difficult it is to find time to plan for the future and I am here to help walk you through it.