Older woman creating estate plan with attorney

4 Reasons Why Estate and Tax Planning Go Hand-in-Hand

When designing a plan that reflects your end-of-life wishes, it’s important to set up a meticulous estate plan that integrates appropriate tax planning strategies. Especially in cases where there is a lot of value to transfer to beneficiaries, it is important to consider any possible tax impacts that the transfer may hold.

Engaging with an attorney who is knowledgeable in both estate and tax planning can mitigate the loss of value of an estate to government coffers. Here are a few reasons why estate and tax planning must be considered together.

  1. The Value of an Estate Impacts Federal Taxes Due

When an estate is passed to beneficiaries, it may incur an estate tax. A federal estate tax is imposed only on very large estates, typically those valued at more than $11.5 million. 

If an estate is deemed subject to a federal estate tax, only the value above the threshold will be subject to estate taxes. 

The taxes will be paid by the estate itself, not by any beneficiaries. Setting up appropriate strategies recommended by an experienced estate and tax planning attorney can ensure that any federal estate taxes are minimized.

  1. States May Impose Estate Taxes

While the federal government limits estate taxes to those estates with a significant value above $11.5 million, many states impose a tax on estates with a value much lower than that set by the federal government. The threshold for estate taxes varies widely between states, but it may begin at much smaller values than those imposed federally. 

Florida, for example, has no additional estate taxes. In contrast, Oregon imposes taxes on estates with a value of only $1 million.

A knowledgeable attorney comfortable with both estate and tax laws in your state will assist you in estate planning techniques to minimize potential estate taxes.

  1. Minimize Inheritance Taxes

An inheritance tax is imposed on beneficiaries who receive a portion of the estate. The amount due is determined by the value of the inheritance and the beneficiary tax rate applied by the state. 

There is no inheritance tax at the federal level, and most states do not impose one. However, six states do impose an inheritance tax. When imposed, it must come from the beneficiary’s funds and is not paid by the estate. 

The six states that impose inheritance taxes are Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. 

If you plan to gift parts of your estate to residents of a state that imposes inheritance taxes, it is especially important to meet with an attorney who understands both estate and tax planning. Your attorney may devise a strategy that reduces the tax burden of beneficiaries who would otherwise be subject to an inheritance tax.

  1. Ensure That Your Estate’s Assets Are Appropriately Valued

Investing in the services of an estate planning lawyer who also understands tax law can ensure that any assets you include in your estate are appropriately valued. This is especially important for tax purposes, as the IRS or state government may challenge the value of assets in an estate that appears to be grossly undervalued. 

Assets are typically classified as tangible or intangible. The value of the assets in your estate must be determined according to appropriate techniques recognized by accounting principles and the IRS. An estate planning attorney can help you with the details of asset valuation.

Once you set up an estate plan, it will likely need to be continually reassessed over the years as new assets are purchased and others are sold. If an asset has not been valued in some time, your estate planning lawyer can ensure that it is reassessed appropriately. Give us a call today to discuss your options.