TAXED TO DEATH

I find there is a lot of confusion about taxes at death. We complain about being taxed when we earn money, spend money and then again when we die. And as Benjamin Franklin said, “nothing can be certain except death and taxes.” Though this can all be true, the “when we die” part isn’t as bad as it may seem, at least, not for most of us. Let’s take a look.

Do you pay taxes at death? Yes and no, see below.

Income Taxes – Yes. A final tax return has to be filed, just as you would complete your personal income taxes each year. There is no additional “death tax” as part of your income tax return.

Estate or “Death” Taxes – Maybe. The IRS considers this tax a right to transfer property at your death. The good news is, most estates (which includes all of your property and assets, including life insurance) don’t have to actually file an estate tax return or pay any taxes. The exception to this rule is if your estate (including prior taxable gifts) is over the unified credit amount, which is currently $11,180,000 per person, so for a married couple their estate would need to be above $22,360,000. This is why I say that most estates are not taxable. However, if your estate is above or may approach that amount (which has changed over the years with different administrations) it is important to plan ways to help mitigate and prepare for this tax, especially since the current estate tax rate is 40%! There are many tools to do so and starting sooner rather than later is advised.

Additional items to note regarding tax and estate planning.

      - Your IRA accounts will continue to be taxed when inherited by your beneficiaries, just as the distributions would be if you were living. Mandatory distributions come into play when inheriting an IRA (Roth conversions may be a helpful tax planning tool). If you plan to include charitable giving in your estate plan, your IRA may be a great asset to give as non-profit organizations don’t pay taxes.

      - Your heirs generally get a step-up in basis to the current value of the asset on the date of death. This means they are only taxed on any gains from that day forward, not from when originally purchased. For example, if you bought stock at $50/share and now it is worth $200/share, you would pay taxes on the gain if sold. However, if inherited at $200/share, your beneficiaries would only pay taxes if they sell above that amount.

      - Proper estate planning includes more than just tax planning. It is important to make sure your wishes are clearly outlined, and to title your assets and designate beneficiaries properly to avoid the time and cost of probate (the legal process of going to court to settle your estate). Also, having powers of attorney for financial and healthcare matters can be extremely helpful.

Arbor Point Advisors/Securities America and its representatives do not provide tax or legal advice; please consult the appropriate professional regarding your specific situation

Advisory services offered through Arbor Point Advisors. Securities offered through Securities America Inc., Member FINRA/SIPC. Arbor Point and Securities America are separate companies. CA Insurance #0E88557