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Five Common Tax Issues In Estate Planning

There are often misconceptions on some basic tax issues in planning (income, gifts, estate, etc.). The following describes some of the common issues where there is a lack of understanding.

  1. Trusts do not need a separate tax identification number if you retain enough control

Since you retain all control of your assets and income, your Social Security number is used for your accounts in the name of the trust if you have a revocable living trust. After you die, the trust becomes irrevocable and a tax identification number would be needed at that time. Although most typical irrevocable trusts have a tax identification number, the Social Security number could be used to establish an account if certain elements of control are retained in the trust by you as the grantor (even though the trust is irrevocable). Planners often discuss the goals of the client to see whether it is best for the grantor, the trust or the beneficiary to be the person or entity that should be responsible for the taxes. An irrevocable trust with no elements of control retained is income taxed at a higher rate on a lower amount of income.

  1. You can give more than $16,000 a year per person without a gift tax

Many realize that you can give up to $16,000 per year, per person without any gift tax. However, most do not realize that even if you give more than $16,000 a year that there would be no gift tax for making the gift provided that you have not given more than the estate tax limit that can be given at your death. The present estate tax limit (where there is no estate tax) in year 2022 is $12,060,000. So, if you haven’t made gifts that exceed the annual exclusion (presently $16,000 per year, per person) in the past, you could even give millions of dollars without a gift tax. The only obligation is that the donor file a gift tax return on that amount that exceeds the annual exclusion which is $16,000 a year per person. Texas has no state gift or state inheritance tax (some states have state estate or inheritance taxes in addition to the federal estate tax).

  1. The person who receives a gift or inheritance is generally not responsible for a gift or inheritance tax

As indicated in 2 above, the one who makes a gift in excess of the annual exclusion of $16,000 per year, per person has a duty to report to the IRS by filing a form, but there is generally no gift tax. Furthermore, although there could be an estate tax if the deceased had an estate that was greater than $12,060,000 (if the deceased died in year 2022), the person who inherits would not have to pay tax on what was inherited under Texas law – unlike some states. However, if the person inherits an IRA, there would be income tax when there are withdrawals from the IRA (and generally an adult child must withdraw within ten (10) years after the year of death). Furthermore, the one who receives a gift or inheritance would be responsible for income tax for interest or dividends after they are the owner (just like any other asset they own that generates income).

  1. Estates are responsible for income taxes even though there is no estate tax

Even if your estate is less than the estate tax limit (presently $12,060,000 – and there is unlimited marital deduction to the extent you give your estate to your spouse), as long as the estate is in existence and it generates interest income or dividends that income of the estate would be taxed to the estate. The estate would file an income tax return and the tax rate would normally be higher on the income earned due to compressed rates. Similarly, a revocable living trust (which would no longer be revocable) would be income taxed at a higher rate after the death of the grantor and an income tax return for the trust would need to be filed. As a result, it is often best to close an estate as soon as possible. Additionally, a final income tax return for the deceased would need to be filed for the year of death of the deceased if enough income was generated before death to incur a tax.

  1. Recalculation of appreciated assets to the value as of the date of death

If you give away an appreciated asset during your life, the one who receives the gift would be taxed on the increase when the asset is sold. However, if you keep the asset until you pass, the beneficiary would only have to pay capital gains on any appreciation from the date of death until when the asset is sold. So, for example, if a person bought stock for $50,000 that was worth $300,000 at their death and was subsequently sold for $400,000, then the beneficiary would only pay capital gains tax on the $100,000 increase from the date of death. This would not be applicable to retirement accounts.

If interested in learning more about this article or other estate planning, Medicaid and public benefits planning, probate, etc., attend one of our free upcoming virtual Estate Planning Essentials workshops by clicking here or calling 214-720-0102. We make it simple to attend and it is without obligation.

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