Skip to main content

Check out our 1Q2024 Market Review and Investment Outlook for 2024

I Stock 24028946 MEDIUM

Death and Taxes

In 1789, Benjamin Franklin wrote a letter to Jean-Baptiste Leroy. In this letter, he wrote “Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.”

Over two centuries later, the same can be said—even with the internet and a large amount of information available, death and taxes still seem to be the only certain things in life, and the former has an important financial impact on the latter. Despite this significance, an alarming number of people are unaware of what taxes, if any, will be owed by their loved ones when they pass away.

Below, you’ll find some key information regarding estate taxes and income taxes on estates that you may not know. These are just a few of the items that I have found to be the first and foremost in the concerns of the individuals appointed to oversee estates.

The estate tax is a tax on your right to transfer property at your death. As an executor, executrix, or administrator, you are required to file an estate tax return when the gross value of the estate is greater than the filing threshold, which, for 2016, is $5,450,000.

These exemptions are allowed to reduce the gross value of the estate:

  • Marital Deduction: One of the primary deductions for married decedents is the Marital Deduction. All property that is included in the gross estate and passes to the surviving spouse is eligible for the marital deduction, but the property must pass "outright."
  • Charitable Deduction: If the decedent leaves property to a qualifying charity, it is deductible from the gross estate.
  • Mortgages and Debt: Debts are paid before an estate is distributed to the heirs, therefore all debt owed by the decedent would reduce the gross estate
  • Administration expenses of the estate: All expenses that may be owed to lawyers, the executor, or during the distribution of the estate will reduce the gross estate.
  • Losses during estate administration: If the estate has any losses due to liquidations or selling of assets, this amount would reduce the gross estate.
Each of these allowable deductions could affect your surviving spouse and your children; but there are actions that can be taken and many ways to arrange your assets and plan your gifting and debt to maximize their impact. A financial strategist, coordinating with your CPA or attorney, can help with this; however, the appointed individuals should know that an estate tax closing letter will not be issued until it is requested by you. If the return was filed after June 1, 2015, the letter will be available about four months after filing…but only at YOUR request.

Other important information to include in your evaluations for tax purposes are the items below — but bear in mind, the fair market value as of date of death is used, not what was originally paid for them:
  • Cash
  • Securities
  • Real estate
  • Insurance
  • Annuities
  • Business interests
Keep in mind, too, that the Gross Estate will likely include non-probate as well as probate property.

Other taxes to consider as you prepare the estate of your loved one include state of residence estate taxes. Each state has its own estate tax laws, and some states have no estate taxes at all. Be aware of what applies for your loved one.

For all deceased, an individual income tax return must be completed for the portion of the year that the descendant was still alive. Also, a second income tax return for the estate will be needed for the period of time that assets remained in the estate during the probate process. Thus, a total of two income tax returns will be filed for the year of death.

Income tax rates for estates are higher than for individuals. For example, if an estate’s taxable income is over $100,000, it would be taxed at 30% on the income tax return; and if an estate’s taxable income is over $1 million, it would pay the maximum of 40% in income taxes. You may ask, “How can estate can owe an income tax?” Well, there are a number of possible answers: investments pay dividends and/or interest; royalties may be paid to the estate; or rent from property will be collected by the estate while it is in probate. All of these factors count as income to the estate, which in turn requires income taxes to be paid.

This overview of the facts was taken from the IRS, and much more is available at their official website, www.irs.gov. Although this essay provides a good starting point of awareness, the estate tax process is quite complex and has many twists and turns. These are just a few questions that can be easily answered by having a knowledgeable financial strategist assisting you in the estate planning procedure.
Related Insights
I Stock 1480873843 JAE Blog 0524 copy 800px

Trust: When a Will is Not Sufficient

For a majority of Americans, a Will is likely sufficient to accomplish their simple wealth transfer needs and desires. For others with more complex wealth transfer stipulations, a Will may fall short and the use of a Trust may be necessary. Learn more about the important estate planning conversation: Will vs. Trust.

Read More
I Stock 1731084042 JAE Blog Website

Have Company Stock in Your 401(k)?

As you work through the labyrinth of decisions that move you from working and planning and working some more, to drawing an income and conserving value, it is always a welcome discovery to reduce your tax bill and, therefore, add another layer of security to your personal financial outlook.

One of the lesser-known strategies some retirees should consider applies if they have company stock within their 401(k) or Profit Sharing Plan; the special tax election is known by the label Net Unrealized Appreciation (NUA). Learn more.

Read More
Trusts Banner NEW FINAL

The Role of Trusts in Financial Planning

The legal construct of a Trust is invaluable in financial management, offering a means to secure and distribute assets according to specific terms and conditions. Given the complexities of individual, family, and business relationships and objectives, a tool with these capabilities is unique. Learn about the various types of Trusts and the role they play in financial planning.

Read More
Play