When estate planning, the consideration of tax issues is important to ensure that your heirs receive everything you want them to receive. Failure to plan for taxes could rob all heirs of some funds or some heirs of a lot of their funds. What do you need to know about estate, inheritance, and capital gains taxes? Here's a guide to these important subjects.
Estate Tax
Technically, all estates are subject to a federal estate tax. However, most estates don't have to deal much with the actual tax because the threshold for taxation is currently $11.7 million (in 2021). Some estates, though, can add up quickly since this includes everything from real estate to insurance policies to business interests. Most executors should consult with a tax professional if the estate may reach this threshold.
In addition to a federal estate tax, keep in mind that some states also impose estate taxes. And among those that do, the threshold for filing or paying could be the same as the federal limit or it may be very different.
Inheritance Tax
An inheritance tax sounds a lot like estate tax but it's quite different. Estate tax is paid by the estate, reducing the amount available to all heirs. However, if your state levies an inheritance tax, this is collected from each heir. Each state has different thresholds for inheritance tax, but the result can be unique to each person. For instance, many states impose higher tax rates on more distant relatives.
Capital Gains Tax
One type of tax that most heirs face — often years after you pass away — is capital gains tax. Capital gains tax is a tax on the profit made from the sale of a capital asset — such as appreciated stocks, a piece of real estate, an antique car, a piece of art, or even a business interest. Capital gains taxes are complex and the rates at which profit is taxed varies depending on the income and sources of the person selling the asset.
Capital gains are addressed within estate planning in two ways. First, you may be able to minimize capital gains taxes for heirs by the way you structure their inheritance. You may also choose to account for varying net values in your estate plan to ensure equitable distribution of assets.
Where to Start
Does this sound complex? As with most tax-related subjects, estate planning for taxes can be difficult. Your best resource is an experienced tax service that specializes in estate planning in your state. Call today to get your questions answered so that you can approach your personal estate plan with confidence that your wishes for heirs will be realized. Reach out to a professional for help with estate planning today.
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