Both those planning an estate and those hoping to inherit from one might have questions about taxes. Many people have heard at least topical information about estate taxes, which some people refer to as death taxes.
There are potentially other taxes that could apply to an estate after someone’s passing in addition to estate taxes. The probate laws in California typically require that the personal representative of an estate address someone’s financial obligations before distributing their resources to their beneficiaries. As a result, do those planning an estate need to specifically address the impact of taxes on their legacy?
Larger estates may be at greater risk
There are certain types of taxes that could theoretically apply to any estate. Filing a final income tax return on behalf of the deceased individual is a responsibility that applies in almost all probate proceedings. Even those who no longer worked due to retirement may potentially have income tax obligations for their personal representative to address.
The estate itself may be responsible for income taxes if the personal representative sells estate resources and generates $600 or more in revenue. Generally, final income tax obligations and estate income tax obligations are moderate or low. However, estate taxes can potentially be relatively high. California does not collect an estate tax, but the federal government does. Higher-value estates could be subject to a tax rate of 40% without proper planning. In 2024, estates worth more than $13.61 million are potentially vulnerable to federal estate taxes.
The assets inherited by family members could potentially trigger taxes for them as well. Capital gains taxes are a concern when the beneficiaries of an estate sell assets that they inherit. Testators putting together estate plans can potentially minimize those tax issues with certain strategies. For example, they could create a limited family partnership as a way to transfer assets without major tax concerns. Trusts can also be a viable solution in some cases. Strategic gifts made over the course of multiple years to minimize gift taxes may also play a role in a tax minimization strategy.
A review of someone’s personal holdings and their plans for their property after their passing could help someone identify the best solutions for reducing the tax burdens imposed on their estate. Recognizing that taxes can diminish someone’s legacy may benefit those putting together an estate plan. Testators who take the time to address taxes and other financial liabilities can often maximize how much their loved ones inherit from their estates after their passing.
