Tax Implications Can Be Important to Factor in Estate Planning

April 03, 2017

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Understanding Estate Taxes

What are estate taxes?
Estate taxes are taxes levied on the net value of the estate of a deceased person before distribution to the heirs. Estate taxes are separate from, and in addition to probate expenses, which can be avoided with a revocable living trust, and also from final income taxes, which must be paid on income you receive in the year you die.

Federal estate taxes are expensive (40%) and they must be paid in cash, usually within nine months after you die. Because few estates have the cash, it has often been necessary to liquidate assets to pay these taxes. But, if you plan ahead, you can reduce and even eliminate estate taxes.

Who has to pay estate taxes?
Your estate will have to pay federal estate taxes if its net value when you die is more than the exempt amount set by Congress at that time. In 2017 the federal exemption is $5.49 million (adjusted for inflation) and the tax rate is 40%.

How is the net value of my estate determined?
To determine the current net value, add your assets, and then subtract your debts. Include your home, business interests, bank accounts, investments, personal property, IRAs, retirement plans and death benefits from your life insurance.

How can I reduce or eliminate my estate taxes?
In the simplest terms, there are three ways:

  1. If you are married, use both estate tax exemptions.
  2. Remove assets from your estate before you die.
  3. Buy life insurance to replace assets given to charity and/or pay any remaining estate taxes.

Below is a bit more detail about each of the three ways you can either reduce or eliminate your estate taxes. Contact Evans Case, LLP to speak to a skilled estate planning attorney if you have any further questions.

If Married, Use Both Exemptions
Living Trust with Tax Planning
• Uses both spouses’ estate tax exemptions, doubling the amount protected from estate taxes and saving a substantial amount for your loved ones.

Remove Assets From Estate
Make Annual Tax-Free Gifts
• Simple, no-cost way to save estate taxes by reducing size of estate
• $14,000 ($28,000 if married) each year per recipient (amount tied to inflation)
• Unlimited gifts to charity and for medical/educational expenses paid to provider

Transfer Life Insurance Policies to Irrevocable Life Insurance Trust
• Removes death benefits of existing life insurance policies from estate
• Included in estate if you die within three years of transfer

Qualified Personal Residence Trust
• Removes home from estate at discounted value
• You can continue to live there

Grantor Retained Annuity Trust / Grantor Retained Unitrust
• Removes income-producing assets from estate at discounted value
• You can continue to receive income

Limited Liability Company / Family Limited Partnership
• Lets you start transferring assets to children now to reduce your taxable estate
• Often discounts value of business, farm, real estate or stock
• Can protect the assets from future lawsuits, creditors, spouses
• You keep control

Charitable Remainder Trust
• Converts appreciated asset into lifetime income with no capital gains tax
• Saves estate taxes (asset out of estate) and income taxes (charitable deduction)
• Charity receives trust assets after you die

Charitable Lead Trust
• Removes asset from your estate, saving estate taxes
• Income goes to charity for set time period, then trust assets go to loved ones

Buy Life Insurance
Through Irrevocable Life Insurance Trust
• Can be inexpensive way to pay estate taxes and/or replace charitable gifts
• Death benefits not included in your estate

Sadly, there are ways in which the after death distribution of a deceased person’s estate could end up very differently from the deceased’s goals for the distribution.

So, failure to take into account potential tax implications and other relevant factors in estate planning could have many negative effects. This is why solid legal advice is such an important thing to have when forming wills and doing other estate planning. Skilled estate planning lawyers at Evans Case, LLP can help individuals with identifying many important factors to take into account when estate planning.

Call us today – 303-757-8300 – to set up your FREE consultation to discuss your estate plan!

Aaron Evans
Managing Partner at Evans Case
evans@evanscase.com