No one wants any more of their estate going to the tax collector than is absolutely necessary. In the state of Georgia, we’re fortunate–there are no state taxes on the estate of someone who passes away or on the inheritance of their beneficiaries. But there are still federal estate taxes to be dealt with, and there are other estate planning decisions that have tax implications.
A trust can be set up to achieve a number of different purposes. From the standpoint of taxes, the key decision that must be made is whether the trust is to be revocable or irrevocable. Part of setting up the trust is picking the beneficiaries, the same as would be done in a last will and testament.
With a revocable trust, the grantor–the person setting up and funding the trust–is free to change the beneficiaries.
The advantage of this is flexibility. New people come into all of our lives. One of them might be someone a grantor wishes to include in a previously established trust. On the less sunny side, the grantor may have a falling out with someone and want to remove them from the trust. A grantor who becomes concerned about the lifestyle of their beneficiaries may wish to adjust the trust and make its benefits conditional on changes (i.e., beating addiction, spending more responsibility, etc.).
Whatever the reason is for the change, a revocable trust allows the grantor to do it. The cost is that they give up tax advantages.
Those tax advantages can be obtained by setting up the irrevocable trust. As the name suggests, this is a trust whose beneficiaries may not be altered. The rewards for giving up flexibility include not counting the assets of a trust in the gross value of an estate at tax time. A grantor is allowed to make an annual contribution that is tax-exempt.
The federal estate tax kicks in when holdings are valued at $11.7 million or greater. Grantors can reduce the value of their estate–and thereby the tax exposure of themselves and their heirs through other steps as well…
Steps that can be taken to lower the value of an estate while still getting assets to intended beneficiaries can have a significant tax impact. The federal estate tax structure has a progressive design, wherein the rate increases as the value goes up. Current rates range anywhere from 18 percent to 40 percent.
When planning an estate, it’s crucial to understand how different types of assets can impact estate taxes. The tax treatment of various assets—whether real estate, business interests, retirement accounts, or life insurance—can vary significantly, affecting the overall tax burden of an estate.
Real Estate: Real estate, such as homes, commercial properties, or land, is one of the most common assets in an estate. When real estate is inherited, its value is typically subject to estate taxes if the estate exceeds the exemption limit. However, beneficiaries may benefit from the “step-up in basis” rule, which adjusts the property’s value to the market price at the time of the decedent’s death. This can substantially reduce capital gains taxes if the property is later sold.
Business Interests: If the decedent owned a business or shares in a closely held company, these assets may be subject to estate taxes based on their valuation at the time of death. Business interests can be complicated to value, and the inclusion of this asset can potentially push the estate above the taxable threshold. There are tax planning strategies, such as creating family limited partnerships (FLPs) or using the Section 6166 election to defer estate taxes, which allow heirs to retain control of the business while minimizing the immediate tax burden.
Retirement Accounts: Retirement accounts like IRAs, 401(k)s, and pensions are also part of many estates. These assets are usually subject to income taxes when inherited, as they were funded with pre-tax dollars. Additionally, the beneficiary will be required to pay taxes on any distributions. It’s important to designate beneficiaries carefully and explore options such as Roth IRA conversions or “stretch” IRAs to minimize tax liability on inherited retirement accounts.
Life Insurance: Life insurance policies can offer financial relief to beneficiaries, but the proceeds may be taxable if the policy is owned by the decedent. To avoid estate taxes, an estate tax planning lawyer may recommend placing the policy in an Irrevocable Life Insurance Trust (ILIT), removing it from the taxable estate and providing tax-free proceeds to beneficiaries.
By understanding the tax implications of various asset types, individuals can work with an estate tax planning lawyer to structure their estate in a way that maximizes benefits for heirs and minimizes tax burdens. An experienced lawyer provides tailored strategies to ensure the estate is protected from unnecessary taxes.
Lanier Law Group has estate tax planning attorneys with deep background in financial planning. Our ability to combine sound long-range financial thinking with sharp legal skill helps us work with clients to craft the estate plan best suited to their needs. From our Gainesville office just off I-985, we serve all of Northeast Georgia.