When planning inheritances, three important possibilities should be considered in order to leave a “low tax” inheritance.
In 2021 the federal estate tax exemption is $11.7 million, $23.4 million for a married couple. Texas has no estate or inheritance tax.
People with large estates should consider the federal gift and generation- skipping tax.
People with real property or heirs in another state or country should consider whether an estate or inheritance tax will be imposed there.
All of us should consider leaving an estate in a form which minimizes our heirs’ income and capital gains taxes.
Three important possibilities should be considered when planning inheritances.
The first is the benefit of a “step up in basis,” of allowing the person inheriting an investment to inherit it at the fair market value on the date of death. When the heir sells the investment, tax will be due on a smaller amount (assuming that the value on the date of death is greater than the original purchase value).
The second is avoiding accelerated distribution of 401(k)s and IRAs on inheritance. This increases the heir’s income in the initial years instead of spreading out the increase over an expected lifetime, resulting in higher income tax for the heir. A Roth does not pose this problem.
The third is giving shares in a closely held company, not cash. Those shares are usually hard to sell so hard to value. But both the Will and a document signed by the heir must disclaim any part of the shares which would result in an estate tax, leaving them to a charity.
Elder law attorney, Terry Garrett, is a member of the National Academy of Elder Law Attorneys and is an Approved Guardianship Attorney. She assists people in elder law, estate and special needs planning, guardianship and settling estates. She graduated with honors from Cornell University. She was on the Dean’s List at Wharton Business School. She earned her J.D. at Columbia Law School, receiving the Parker Award and a Mellon Fellowship.