Estate Tax Planning

Estate taxes commonly referred to as “death taxes” are taxes imposed on property at the time of the property owner’s death. Estate taxes are different and in addition to probate expenses, which must be paid on the income one receives in the year they die, but can be avoided with a revocable living trust. The estate tax is an assessment on everything you own at the time of your death, which also includes inheritance taxes- taxes, imposed on the recipient of inherited property.


You have to have a set amount of assets before your heirs have to worry about paying anything in estate taxes. That exclusion amount seems to change almost yearly. For instance in 2008 it was set at $2 million. In 2009 it jumped to $3.5 million. In 2017 it was at $5.49 million, and currently it sits at $11.4 million (2019). In addition some states have their own estate tax. New Jersey in 2017, for example, had a state estate tax assessed once the assets exceed $675,000 per person. Currently Nebraska has no state estate tax.


When dealing with estate taxes, your best bet is to meet with a qualified accountant to help you sort through the many issues associated with them. The qualified accountant can help you with a pivotal issue which is the Step-Up in Basis for property. This means that the cost basis of inherited property assumes a valuation at date-of-death. This can be financially beneficial to the person inheriting a property that may have once had a low cost basis, as it would have subjected them to high capital gain taxes.


Ask yourself these 5 questions before meeting with an accountant;


1. Do You Have a Will?

It may seem like a silly question, but according to a 2014 Rocket Lawyer survey, 64 percent of Americans don’t have a Will. Shockingly, 17 percent said they didn’t think they needed one. Consider the fact that without a Will your estate is divided in probate court. This process is not only lengthy at times, but a judge decides the fate of your estate and the expenses of probate are paid by your beneficiaries.


2. Have You Reviewed Your Beneficiaries?

The only way you can be sure your money will go to who you want it to go to is by reviewing the beneficiaries. This is because some of your assets are not distributed through a Will. For instance most life insurance and retirement funds name their own beneficiaries for that particular asset. You should review all beneficiaries after all major life changes. This includes births, deaths, marriage, divorce, etc.


3. Have you considered a Trust?

Trusts can be set up in many ways, but an irrevocable (or permanent) trust may offer you the most tax benefits. If you have a sizable estate, or if you are un-sure about your heirs efficiency with your money, you can set up the trust with an appointed trustee to distribute your wealth. The tax consequences of a trust are still evident, and because trusts vary so much in how they can be created, you will want to consult with your accountant about taxes associated with your particular trust.


4. Should You Convert Your IRA to a Roth IRA Account?

Traditional IRA’s are subject to income tax if passed to a beneficiary who is not a spouse. Debates in Congress by both political parties recently, center on forcing the beneficiary to take the money over a short period of time, say 5 years or less. Essentially this means the beneficiary pays the income tax up front instead of over a life-time of disbursements. You can avoid leaving that tax bill to your beneficiaries by gradually converting the IRA to a Roth account that has tax-free distributions. It is recommended the conversion take place over several years as the amount converted is subject to income taxes and you want to be sure you don’t belong into a higher tax bracket by doing so.


5. Can You Gift Money Now?

You can reduce your estate tax by gifting assets from your estate. Currently the limit is $15,000 ($30,000 if married) per person. Of course you can gift more, but anything over $15,000 must be reported on a gift tax return. The money is always tax-free for the recipient. Charitable Donations can be made as well to “spend down” your estate. In addition any payments for medical or educational expenses can be paid from your estate too.


Estate tax planning is an important step in preparation for your future. Dwain Wulf, a partner and CPA with OFWF says that you need to consider how to meet your life goals. “My job is helping you to pay as little as possible in estate taxes”. With due diligence and preparation you can accomplish this not only for yourself, but also for your beneficiaries.

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