Taxes And Estate Planning
Estate planning reflects and connects many areas of an individual’s life, both financial and personal. Tax matters should be a key consideration during the estate planning process. Certain estate planning strategies can help estate owners minimize their tax burdens and ensure that more of their assets are passed on to beneficiaries. If you are currently estate planning or looking to develop your estate plan soon, the team of dedicated Florida and Texas estate planning lawyers at Fleurinord Law, PLLC may be able to help you with tax matters and all other matters related to the plan. Contact us today at (888) 904-2297 to learn more.
Which Taxes Apply to Estate Planning?
Several different types of taxes may be relevant to an individual’s estate planning, depending on the value of the estate. At the federal level, the estate tax and gift tax may apply. In addition, some states assess their own estate and gift taxes, which are assessed and collected separately from federal taxes. Fortunately, neither Florida nor Texas assesses estate taxes or gift taxes.
Who Has To Pay the Federal Estate Tax?
According to the Internal Revenue Service (IRS), the estate tax is assessed on an estate owner’s right to transfer property after their death. The estate tax only needs to be paid if the gross estate of the deceased––meaning the total dollar value of all of their assets––is more than the filing threshold specified for the year in which they died. The filing threshold for 2023 is $12,920,000, so only estates valued over that number are subject to estate taxes. Historically, the threshold for filing does increase on a year-by-year basis.
How Is the Estate Tax Rate Determined?
The federal estate tax rate also varies depending on the size of the taxable estate and can be anywhere from 18% to 40% of the estate. Here is a breakdown of the different rates:
- 18% – Applies when the taxable amount is $0-$10,000, with the total tax owed as 18% of the taxable amount.
- 20% – $10,001-$20,00, tax owed is $1,800 plus 20% of the amount over $10,000
- 22% – $20,001-$40,000, tax owed is $3,800 plus 22% of the amount over $20,000
- 24% – $40,001-$60,000, tax owed is $8,200 plus 24% of the amount over $40,000
- 26% – $60,001-$80,000, tax owed is $13,000 plus 26% of the amount over $60,000
- 28% – $80,001 to $100,000, tax owed is $18,200 plus 28% of the amount over $80,000
- 30% – $100,001 to $150,000, tax owed is $23,800 plus 30% of the amount over $100,000
- 32% – $150,001 to $250,000, tax owed is $38,800 plus 32% of the amount over $150,000
- 34% – $250,001 to $500,000, tax owed is $155,800 plus 37% of the amount over $500,000
- 37% – $750,001 to $1,000,000, tax owed is $248,300 plus 39% of the amount over $750,000
- 39% – $1,000,001 and up, tax owed is $345,800 plus 40% of the amount over $1,000,000
You can learn more about the estate tax and other matters related to taxes and estate planning by calling the Florida and Texas estate planning lawyers at Fleurinord Law, PLLC.
Do Beneficiaries Pay Taxes on Inherited Money?
There is no federal inheritance tax assessed by the Internal Revenue Service on beneficiaries who inherit money or other assets through a Last Will and Testament or one of the many types of Trusts. Some states do assess inheritance taxes, but Florida and Texas do not.
Tax Deductible Contributions
However, there are some exceptions for life insurance proceeds, retirement accounts, and savings bond interest. Funds inherited from an IRA, 401(k), or 403(b) are taxable if the money in the account was tax deductible when it was added to the account. Most contributions to retirement accounts are tax deductible, but beneficiaries should consider speaking with an experienced tax expert if they received funds from non-deductible contributions, as they may owe taxes on this money.
Roth IRAs and Life Insurance Policies
If a beneficiary is left money from a Roth IRA, they do not owe any taxes on most withdrawals because these contributions are not tax deductible. Beneficiaries are also not required to pay taxes on money generated from contributions, provided that the account is at least five years old. Beneficiaries of life insurance policies typically do not owe taxes on the proceeds of the account, but may sometimes need to pay taxes if these proceeds include interest or if the policy was transferred to the beneficiary for cash.
Who Pays Capital Gains Tax on a Deceased Estate?
In most cases, there is no capital gains tax due on assets inherited by beneficiaries through an estate plan. This is because of a tax provision called “step-up in basis” or “stepped-up basis,” which occurs when the price of an inherited asset on the date of the estate owner’s death is higher than the original purchase price. The IRS tax code allows the cost basis to be raised to a higher price, which minimizes capital gains taxes when the asset is later sold. This provision applies to a variety of financial assets, including real estate, stocks, bonds, and mutual funds.
For purposes of illustration, if an estate owner purchased a home for $100,000 thirty years before their death, and at the time they pass away, the home’s value had increased to $1,000,000, then had the estate owner sold the home during their lifetime, the $900,000 increase to the home’s value would be subject to the capital gains tax. However, if they still had the home at the time of their death and left it to a family member in a Will or Trust, this $900,000 gain would not be subject to the estate tax, thanks to the step-up in basis provision. If the beneficiary who inherited the home were to sell that property for $1.2 million at a later date, then they would owe capital gains taxes on the $200,000 increase in value.
Contact Our Florida and Texas Estate Planning Lawyers
Taxes and estate planning can be complicated, especially for those with higher-value estates that are subject to the federal estate tax. If you have tax-related questions regarding your estate plan, the experienced estate planning lawyers at Fleurinord Law, PLLC may be able to provide you with answers. Call us today at (888) 904-2297 to learn more about how to account for tax considerations in your estate plan.