Tax Issues to Consider When Planning Your Estate


During estate planning, most people are concerned about ensuring that the people they care about most receive a portion of their material possessions. For certain estates, however, there are many ways in which faulty or shortsighted estate planning can drastically reduce those portions, including incurring unnecessary administrative expenses and taxes. 

There are several types of taxes that may have to be paid from an estate before the heirs receive their shares: 

  • Any personal income tax accumulated prior to death
  • Tax on any income generated by the estate assets during probate
  • Capital gains taxes from the sale of estate assets
  • Taxes on forgiven debts
  • Taxes on deferred income accounts like 401(k) accounts and IRAs
  • Federal estate tax 

While the federal estate tax only applies to estates in excess of $5.25 million, the other taxes can apply to any estate regardless of size. However, with proper planning, they can be minimized or avoided altogether. Indeed, common estate planning blunders like failing to designate beneficiaries on accounts or insurance policies can generate significant extra tax liability that would otherwise be easily avoided. Even people with large estates that are subject to the federal estate tax have several options for at least reducing the amount of tax they must pay, but exercising nearly any of these options requires advance preparation and planning. 

Many people hesitate to go through the estate planning process, but the peace of mind it can give you and the benefits it can generate for the people you love and the causes you care about mean that it is always worthwhile.