What You Need to Know About Estate Taxes

May 30, 2023

Most Americans don’t have to worry about federal estate and gift taxes. However, if you’re even moderately wealthy and want to transfer wealth to your children and grandchildren, you’ll want to know how to protect your ability to pass wealth to the next generation. A recent article from Woman’s World, “If You’re Rich, Read This—Your Estate Taxes Could Be at Stake (And Your Kids at Risk of Losing Their Inheritance” provides a good overview of estate taxes. If any of these issues are relevant to you, meet with an experienced estate planning attorney to learn how your state’s tax laws may impact your children’s inheritance.

A well-created estate plan can help you achieve your goals and minimize tax liability. There are three types of taxes the IRS levies on gifts and inheritances.

Few families worry about federal estate taxes for now. However, this will change in the future, and planning is always wiser. In 2023, the federal estate tax exemption is $12.92 million. Estates valued above this level have a tax rate of 40% on assets. People at this asset level usually have complex estate plans designed to minimize or completely avoid paying these taxes.

An estate not big enough to trigger federal estate taxes may still owe state estate taxes. Twelve states and the District of Columbia impose their own state taxes on residents’ estates, ranging from 0.8 percent to 20 percent, and some have a far lower exemption level than the federal estate tax. Some begin as low as $one million.

Six states impose an inheritance tax ranging between 10 percent and 18 percent. The beneficiary pays the tax, even if you live out of state. Spouses are typically exempt from inheritance taxes, which are often determined by kinship—sons and daughters pay one amount, while grandchildren pay another.

Taxpayers concerned about having estates big enough to trigger estate or inheritance taxes can make gifts during their lifetime to reduce the estate’s tax exposure. In 2023, the federal government allows individuals to make tax-free gifts of up to $17,000 in cash or assets to as many people as they want every year.

A couple with three children could give $17,000 to each of their children, creating a tax-free transfer of $102,000 to the next generation ($17,000 x 3 children x 2 individuals). The couple could repeat these gifts yearly for as long as they wished. Over time, these gifts could substantially reduce the size of their estate before it would be subject to an estate tax. It also gives their heirs a chance to enjoy their inheritance while their parents are living.

It should be noted that gifts over $17,000 in 2023 count against the individual estate tax limit. Therefore, your federal estate tax exemption will decline if you give more than the limit. This is why it’s essential to work with an estate planning attorney who can help you structure these gifts and discuss other estate tax and asset protection strategies.

Reference: Woman’s World (April 5, 2023) “If You’re Rich, Read This—Your Estate Taxes Could Be at Stake (And Your Kids at Risk of Losing Their Inheritance”

Bernie Sanders Again Presents Plan for Higher Estate Taxes

May 12, 2023

Sen. Bernie Sanders, with Senator Elizabeth Warren and Representative Jimmy Gomez, are introducing new legislation targeting heirs who receive over $3.5 million. Named the: For the 99.5 Percent Act,” the proposed bill would impose a 45% tax on estates worth $3.5 million and a 65% tax on estates worth over $1 billion.

It’s similar to legislation that Sanders has tried to get passed in several variations over the last few years. It comes as some Republicans seek to roll back the estate tax entirely, says Insider’s recent article entitled, “Bernie Sanders once again wants to raise taxes on rich heirs.”

“It is unacceptable that working families across the country today are struggling to file their taxes on time and put food on the table while the wealthiest among us profit off of enormous tax loopholes and giant tax breaks,” Sanders said in a press release.

The amount of money exempt from the estate tax has increased significantly over the last two decades. For 2023, the tax exemption stands at just under $13 million, a large bump from around $12 million in 2022.

As of 2019, the most recent year for which the IRS has data, only 0.08% of adult deaths were eligible for the estate tax. The Tax Policy Center likewise saw that fewer than 0.1% of people who would die in 2020 would owe estate tax. The estate tax rate only goes up to 40% on estates worth a million dollars more than the exempted amount.

The senator’s proposed legislation also seeks to address the loopholes that the ultra-wealthy can use to protect their assets from taxation, like dynasty trusts that don’t incur estate or gift taxes when the family doles out money from a passed-down trust.

However, like Sanders’ previous attempts to hike taxes on the rich, the proposal is unlikely to make it far.

Even when Democrats held both chambers of Congress, centrist sentiment stalled proposed hikes on big corporations and closing loopholes for private equity investors.

With tax-averse Republicans holding the House, any legislation to hike rates will not be successful.

Reference: Insider (April 18, 2023) “Bernie Sanders once again wants to raise taxes on rich heirs”

What Is the Meaning of Step-Up in Basis?

April 26, 2023

This aspect of the tax code changes the value—known as the “cost basis”—of an inherited asset, including stocks or property. As a result, the heir may receive a reduction in the capital gains tax they must pay on the inherited assets. For others, according to the recent article, “What Is Step-Up In Basis?” from Forbes, it allows families to avoid paying what would be a normal share in capital gains taxes by passing assets across generations. Estate planning attorneys often incorporate this into estate plans for their clients to minimize taxes and protect assets.

Here’s how it works.

If someone sells an inherited asset, a step-up in basis may protect them from higher capital gains taxes. A capital gains tax occurs when an asset is sold for more than it originally cost. A step-up in basis considers the asset’s fair market value when it was inherited versus when it was first acquired. This means there has been a “step-up” from the original value to the current market value.

Assets held for generations and passed from original owners to heirs are never subject to capital gains taxes, if the assets are never sold. However, if the heir decides to sell the asset, any tax is assessed on the new value, meaning only the appreciation after the asset had been inherited would face capital gains tax.

For example, Michael buys 200 shares of ABC Company stock at $50 a share. Jasmine inherits the stock after Michael’s death. The stock’s price is valued at $70 a share by then. When Jasmine decides to sell the shares five years after inheriting them, the stock is valued at $90 a share.

Without the step-up in basis, Jasmine would have to pay capital gains taxes on the $40 per share difference between the price originally paid for the stock ($50) and the sale price of $90 per share.

Other assets falling under the step-up provision include artwork, collectibles, bank accounts, businesses, stocks, bonds, investment accounts, real estate and personal property. Assets not affected by the step-up rule are retirement accounts, including 401(k)s, IRAs, pensions and most assets in irrevocable trusts.

If someone gives a gift during their lifetime, the recipient retains the basis of the person who made the gift—known as “carryover basis.” Under this basis, capital gains on a gifted asset are calculated using the asset’s purchase price.

Say Michael gave Jasmine five shares of ABC Company stock when it was priced at $75 a share. The carryover basis is $375 for all five stocks. Then Jasmine decides to sell the five shares of stock for $150 each, for $750. According to the carryover basis, Jasmine would have a taxable gain of $375 ($750 in sale proceeds subtracted by the $375 carryover basis = $375).

The gift giver is usually responsible for any gift tax owed. The tax liability starts when the gift amount exceeds the annual exclusion allowed by the IRS. For example, if Michael made the gift in 2018, he could avoid gift taxes on a gift he gave to Jasmine that year with a value of up to $15,000. This gift tax exemption for 2023 is $17,000.

Reference: Forbes (March 28, 2023) “What Is Step-Up In Basis?”

Does Estate Tax Have an Impact on My Plans?

April 24, 2023

Yahoo Finance’s recent article entitled “This Is How Much Estate Taxes Will Cost You in Florida” explains that Florida abolished its estate tax in 2004. Before that, federal law allowed a credit for death taxes at the state level but on the federal tax return. When you filed your state taxes, the federal government changed the credit to a deduction. In Florida, the estate tax was based solely on the federal credit, so the state no longer needed the tax.

Thankfully, Missouri has no estate tax.

Estate taxes are imposed by the government on the estate of a recently deceased person.

These taxes only apply to estates worth a certain amount, which varies based on where the tax is levied. You may have heard the term “death tax.” However, it’s really an estate tax. This tax differs from the inheritance tax, which is levied on money after it has been passed on to the deceased’s heirs.

Florida has no inheritance tax. However, other states’ inheritance taxes may apply to you. In Pennsylvania, for example, the inheritance tax may apply to you, even if you live out of state and the deceased lived in the state.

Florida has a no gift tax. The federal gift tax exemption is $17,000 in 2023. Gifting more than that to one person in a year counts against your lifetime exemption of $12.92 million.

Even though Florida doesn’t have an estate tax, you might still owe the federal estate tax. This is triggered for estates worth more than $12.92 million in 2023. As a result, estates worth less than $12.92 million won’t pay any federal estate taxes at all. However, if your estate is more than that, any money above that mark will be taxed.

The federal estate tax exemption is “portable” for married couples. What does that mean? If a married couple plans appropriately, they can have an exemption of up to $25.84 million after both spouses have died. The highest tax rate is 40% if an estate exceeds that amount.

The state sales tax is 6%. However, considering local sales taxes, the average is 7.01%. Property taxes in Florida are right in the middle of the pack nationwide, with an average effective rate of 0.80%.

There’s been no estate tax in the state of Florida since 2005. However, even if you live in Florida, your estate may still owe a federal estate tax when you pass away. No matter how much you have in your estate, it’s essential to make proper plans so your estate is taken care of and your descendants are now stuck with a large tax bill. Ask an experienced estate planning attorney for help.

Reference: Yahoo Finance (March 27, 2023) “This Is How Much Estate Taxes Will Cost You in Florida”

What Strategies Minimize Estate Taxes?

March 15, 2023

The gift and estate tax benefits from the Tax Cuts and Jobs Act (TCJA) are still in effect. However, many provisions will sunset at the end of 2025, according to a recent article “Trust and estate planning strategies” from Crain’s New York Business.

The most important aspect for estate planning was the doubling of the estate, gift and generation-skipping transfer tax exemptions. Adjusted for inflation, the current federal estate, gift and GST exclusion is $12.92 million in 2023. This is more than double the pre-TCJA amount, which will return in 2026, unless Congress makes any changes.

While these levels are in effect, there are strategies to consider.

Maximize gifting up to the 2023 annual exclusion of $17,000 per taxpayer, or $34,000 for married couples.
Depending on the value of the entire estate, consider strategies to keep it below the current exemption among of $12.92 million or $25.84 (married). If the estate is less than the exemption amount, no federal estate tax will need to be paid.
Plan charitable giving, including charitable IRA rollovers to make the most of the deduction on 2023 income tax returns. Qualified charitable distributions made directly from an IRA could be used to satisfy Required Minimum Distributions (RMDs) and exclude them from taxable income.
Set up 529 Plan accounts for children and/or grandchildren and consider making five years of annual exclusion gifts. Take into account any gifts made during the year to children and/or grandchildren when doing this.
Submit tuition or any non-reimbursable medical expenses directly to the school or medical provider to avoid having these amounts count towards the annual or lifetime gift tax exemption.
Explore intrafamily lending, which is used to transfer partial earnings to family members without lowering the lifetime estate tax exemption or triggering gift taxes.
Re-evaluate insurance coverage, which can provide opportunities to defer or avoid income taxes, or both, and provide assets to pay estate taxes or replace assets used to pay estate taxes.

Not all of these steps will be appropriate for everyone. There are also additional planning steps available that are not listed above. However, understanding the options and discussing with your estate planning attorney will ensure that you are using the most effective strategies to achieve wealth preservation.

Reference: Crain’s New York Business (Feb. 13, 2023) “Trust and estate planning strategies”

What Is Portability and When Should I Make a Portability Election?

March 3, 2023

Portability is a process in which any unused estate tax exemption can be transferred from the deceased spouse to the surviving spouse, according to a recent article from Ag Web, “Use Portability to Avoid a Potential Multi-Million Dollar Estate Mistake.”

What portability helps the surviving spouse to achieve is to put their assets in the best position to be transferred upon their death, to the next generation, with little or no estate taxes being owed.

In 2023, each spouse has a $12.92 million exemption from federal gift and estate taxes, but this high amount is set to drop about $6.6 million per person in 2026. Electing portability now will lock in the high exemption if a spouse dies before December 31, 2025, when the high exemption level ends.

The portability election does not happen automatically, and its critical to take this action, even if all assets were jointly owned and no taxes are owed when the first spouse dies. To elect portability, the surviving spouse must file form 706 Federal Estate Tax Return with the IRS.

Many financial advisors may not believe electing portability is necessary. However, it is. One estate planning attorney advises financial advisors and CPAs to obtain a written document affirming their decision from surviving spouses, if they decline to elect portability.

Portability is relatively recent to married farming couples. This is why many people in the agricultural sector may not be aware of it. An estate planning attorney can help the surviving spouse to file a Form 706. The value of assets may be estimated to the nearest quarter million dollars of value at the first spouse’s death.

Form 706 must be submitted to the IRS within nine months of the first spouses’ death. The deadline can be extended with the use of Form 4768 for an additional six months. However, if the surviving spouse misses the initial deadlines for filing, they can still elect portability up to five years from the date of their spouse’s death, by invoking “Relief under Revenue Procedure 2022-32.”

There were so many applications for extensions made to the IRS that in 2022, the change was made to give surviving spouses more flexibility in applying for portability.

This is a detail to be discussed with your estate planning attorney when preparing or reviewing your estate plan.

Reference: Ag Web (Jan. 30, 2023) “Use Portability to Avoid a Potential Multi-Million Dollar Estate Mistake.”

How Do I Plan for Taxes after Death?

June 21, 2022

Let’s get this out of the way: preparing for death doesn’t mean it will come sooner. Quite the opposite is true. Most people find preparing and completing their estate plan leads to a sense of relief. They know if and when any of life’s unexpected events occur, like incapacity or death, they have done what was necessary to prepare, for themselves and their loved ones.

It’s a worthwhile task, says the recent article titled “Preparing for the certainties in life: death and taxes” from Cleveland Jewish News and doesn’t need to be overwhelming. Some attorneys use questionnaires to gather information to be brought into the office for the first meeting, while others use secure online portals to gather information. Then, the estate planning attorney and you will have a friendly, candid discussion of your wishes and what decisions need to be made.

Several roles need to be filled. The executor carries out the instructions in the will. A guardian is in charge of minor children, in the event both parents die. A person named as your attorney in fact (or agent) in your Power of Attorney (POA) will be in charge of the business side of your life. A POA can be as broad or limited as you wish, from managing one bank account to pay household expenses to handling everything. A Health Care Proxy is used to appoint your health care agent to have access to your medical information and speak with your health care providers, if you are unable to.

Your estate plan can be designed to minimize probate. Probate is the process where the court reviews your will to ensure its validity, approves the person you appoint to be executor and allows the administration of your estate to go forward.

Depending on your jurisdiction, probate can be a long, costly and stressful process. In Ohio, the law requires probate to be open for at least six months after the date of death, even if your estate dots every “i” and crosses every “t.”

Part of the estate planning process is reviewing assets to see how and if they might be taken out of your probate estate. This may involve creating trusts, legal entities to own property and allow for easier distribution to heirs. Charitable donations might become part of your plan, using other types of trusts to make donations, while preserving assets or creating an income stream for loved ones.

Minimizing taxes should be a part of your estate plan. While the federal estate tax exemption right now is historically high $12.06 million per person, on January 1, 2025, it drops to $5.49 million adjusted for inflation. While 2025 may seem like a long way off, if your estate plan is being done now, you might not see it again for three or five years. Planning for this lowered number makes sense.

Reviewing an estate plan should take place every three to five years to keep up with changes in the law, including the lowered estate tax. Large events in your family also need to prompt a review—trigger events like marriage, death, birth, divorce and the sale of a business or a home.

Reference: Cleveland Jewish News (May 13, 2022) “Preparing for the certainties in life: death and taxes”

What Does Portability Mean in Estate Planning?

June 16, 2022

When one spouse dies, the surviving spouse can choose to make a portability election. This means that any unused federal gift or estate tax exemption can be transferred from the deceased spouse to the surviving spouse. This does not happen automatically, says the recent article “It’s So Important to Elect ‘Portability’ For Your Farm Estate” from Ag Web Farm Journal, but it is worth doing.

Your estate planning attorney will explain how you can take advantage of this opportunity, which must be done at the latest within two years of death. In most cases, no taxes are due, but you must file a form to obtain the exemption.

Before portability was an option, spouses each owned about the same amount of assets, or the amount of assets which would use up each other’s exemptions. For many farm and ranch families, the family’s property is titled one-half to each spouse. Now, however, because of portability, the assets can flow through to the surviving spouse.

At the first spouses’ death, the survivor files for the portability election and then has two exemptions to cover assets.

Here’s an example. A family owns assets jointly and their net worth is about $11 million. They have one son, who also farms. When the husband dies, the wife owns everything. However, she neglects to speak with the family’s estate planning lawyer. No estate taxes are due at this time because of the unlimited marital deduction between the two spouses.

When the wife dies in 2026, when the current federal estate tax exemption is set to drop back to $6 million, their son has to pay $2 million in federal estate taxes. There was $11 million in original assets, but only $6 million for the wife’s exemption. Had she filed for portability when the higher estate tax exemption enacted into law under President Trump, then the $5 million taxable estate would have been reduced by the husband’s exemption by $6 million. No federal estate tax would be due.

Farmers, ranchers and any family business owners need to take into consideration the potential estate taxes in future years. In addition, 17 states still have state estate taxes, and usually the amounts taxed are higher than the federal amount.

An experienced estate planning attorney can work with the family to evaluate their tax liability and see if portability will be sufficient, or if a bypass trust or other tools are needed to protect their legacy.

Reference: Ag Web Farm Journal (April 18, 2022) “It’s So Important to Elect ‘Portability’ For Your Farm Estate”

Do You Have to Pay Taxes on Inherited IRAs?

March 22, 2022

If you’ve inherited an IRA, you won’t have to pay a penalty on early withdrawals if you take money out before age 59½. However, you may have to make those withdrawals earlier than you’d wanted. Doing so may trigger additional income taxes, and even push you into a higher tax bracket. The IRA has always been a complicated retirement account. While changes from the SECURE Act have simplified some things, it’s made others more stringent.

A recent article titled “How Do I Avoid Paying Taxes on an Inherited IRA?” from Aol.com explains how the traditional IRA allows tax-deductible contributions to be made to the account during your working life. If the IRA includes investments, they grow tax—free. Taxes aren’t due on contributions or earnings, until you make withdrawals during retirement.

A Roth IRA is different. You fund the Roth IRA with after-tax dollars, earnings grow tax free and there are no taxes on withdrawals.

With a traditional inherited IRA, distributions are taxable at the beneficiary’s ordinary income tax rate. If the withdrawals are large, the taxes will be large also—and could push you into a higher income tax bracket.

If your spouse passes and you inherit the IRA, you may take ownership of it. It is treated as if it were your own. Howwever, if you inherited a traditional IRA from a parent, you have just ten years to empty the entire account and taxes must be paid on withdrawals.

There are exceptions. If the beneficiary is disabled, chronically ill or a minor child, or ten years younger than the original owner, you may treat the IRA as if it is your own and wait to take Required Minimum Distributions (RMDs) at age 72.

Inheriting a Roth IRA is different. Funds are generally considered tax free, as long as they are considered “qualified distributions.” This means they have been in the account for at least five years, including the time the original owner was alive. If they don’t meet these requirements, withdrawals are taxed as ordinary income. Your estate planning attorney will know whether the Roth IRA meets these requirements.

If at all possible, always avoid immediately taking a single lump sum from an IRA. Wait until the RMDs are required. If you inherited an IRA from a non-spouse, use the ten years to stretch out the distributions.

If you need to empty the account in ten years, you don’t have to withdraw equal amounts. If your income varies, take a larger withdrawal when your income is lower and take a bigger withdrawal when your income is higher. This can result in a lower overall tax liability.

If you’ve inherited a Roth IRA and funds were deposited less than five years ago, wait to take those funds out for at least five years. When the five years have elapsed, withdrawals will be treated as tax-free distributions.

One of the best ways for heirs to avoid paying taxes on an IRA is for the original owner, while still living, to convert the traditional IRA to a Roth IRA, paying taxes on contributions and earnings. This reduces the taxes paid if the owner is in a lower tax bracket than beneficiaries, and lets the beneficiaries withdraw funds as they want with no income tax burden.

Reference: Aol.com (Feb. 25, 2022) “How Do I Avoid Paying Taxes on an Inherited IRA?”

Should I have a Charitable Trust in My Estate Plan?

March 15, 2022

Charitable trusts can be created to provide a reliable income stream to you and your beneficiaries for a set period of time, says Bankrate’s recent article entitled “What is a charitable trust?”

Establishing a charitable trust can be a critical component of your estate plan and a rewarding way to make an impact for a cause you care deeply about. There are a few kinds of charitable trusts to consider based on your situation and what you may be looking to accomplish.

Charitable lead trust. This is an irrevocable trust that is created to distribute an income stream to a designated charity or nonprofit organization for a set number of years. It can be established with a gift of cash or securities made to the trust. Depending on the structure, the donor can benefit from a stream of income during the life of the trust, deductions for gift and estate taxes, as well as current year income tax deductions when the assets are donated to the trust.

If the charitable lead trust is funded with a donation of cash, the donor can claim a deduction of up to 60% of their adjusted gross income (AGI), and any unused deductions can generally be carried over into subsequent tax years. The deduction limit for appreciated securities or other assets is limited to no more than 30% of AGI in the year of the donation.

At the expiration of the charitable lead trust, the assets that remain in the trust revert back to the donor, their heirs, or designated beneficiaries—not the charity.

Charitable remainder trust. This trust is different from a charitable lead trust. It’s an irrevocable trust that’s funded with cash or securities. A CRT gives the donor or other beneficiaries an income stream with the remaining assets in the trust reverting to the charity upon death or the expiration of the trust period. There are two types of CRTs:

A charitable remainder annuity trust or CRAT distributes a fixed amount as an annuity each year, and there are no additional contributions can be made to a CRAT.
A charitable remainder unitrust or CRUT distributes a fixed percentage of the value of the trust, which is recalculated every year. Additional contributions can be made to a CRUT.

Here are the steps when using a CRT:

Make a partially tax-deductible donation of cash, stocks, ETFs, mutual funds or non-publicly traded assets, such as real estate, to the trust. The amount of the tax deduction is a function of the type of CRT, the term of the trust, the projected annual payments (usually stated as a percentage) and the IRS interest rates that determine the projected growth in the asset that’s in effect at the time.
Receive an income stream for you or your beneficiaries based on how the trust is created. The minimum percentage is 5% based on current IRS rules. Payments can be made monthly, quarterly or annually.
After a designated time or after the death of the last remaining income beneficiary, the remaining assets in the CRT revert to the designated charity or charities.

There are a number of benefits of a charitable trust that make them attractive for estate planning and other purposes. It’s a tax-efficient way to donate to the charities or nonprofit organizations of your choosing. The charitable trust provides benefits to the charity and the donor. The trust also provides upfront income tax benefits to the donor, when the contribution to the trust is made.

Donating highly appreciated assets, such as stocks, ETFs, and mutual funds, to the charitable trust can help avoid paying capital gains taxes that would be due if these assets were sold outright. Donations to a charitable trust can also help to reduce the value of your estate and reduce estate taxes on larger estates.

However, charitable trusts do have some disadvantages. First, they’re irrevocable, so you can’t undo the trust if your situation changes, and you were to need the money or assets donated to the trust. When you establish and fund the trust, the money’s no longer under your control and the trust can’t be revoked.

A charitable trust may be a good option if you have a desire to create a legacy with some of your assets. Talk with an experienced estate planning attorney about your specific situation.

Reference: Bankrate (Dec. 14, 2021) “What is a charitable trust?”

Estate Planning Blog

Serving Clients Throughout North Central Missouri

What You Need to Know About Estate Taxes

Bernie Sanders Again Presents Plan for Higher Estate Taxes

What Is the Meaning of Step-Up in Basis?

Does Estate Tax Have an Impact on My Plans?

What Strategies Minimize Estate Taxes?

What Is Portability and When Should I Make a Portability Election?

How Do I Plan for Taxes after Death?

What Does Portability Mean in Estate Planning?

Do You Have to Pay Taxes on Inherited IRAs?

Should I have a Charitable Trust in My Estate Plan?

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What You Need to Know About Estate Taxes

Bernie Sanders Again Presents Plan for Higher Estate Taxes

What Is the Meaning of Step-Up in Basis?

Does Estate Tax Have an Impact on My Plans?

What Strategies Minimize Estate Taxes?

What Is Portability and When Should I Make a Portability Election?

How Do I Plan for Taxes after Death?

What Does Portability Mean in Estate Planning?

Do You Have to Pay Taxes on Inherited IRAs?

Should I have a Charitable Trust in My Estate Plan?

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