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Home » Two Tax Issues That Can Impact Your Estate

Two Tax Issues That Can Impact Your Estate

April 8, 2019 by Stephen Unsworth

taxMany people feel as though the assets that you have left after you pay taxes all of your life should not be subject to taxation while they are being transferred after you die. Though this argument has merit, there is in fact a federal estate tax, and it is far more than a nuisance. This tax carries a very hefty 40 percent maximum rate.

The existence of the estate tax is the bad news; the good news is that most families do not pay the tax, because there is an estate tax credit or exclusion that is relatively high. The exclusion is the amount that you can transfer tax-free. Anything that you are transferring that exceeds the amount of the exclusion is potentially subject to the estate tax.

During the current calendar year, the federal estate tax exclusion is $11.4 million. You may see a somewhat higher figure next year, because the exclusion is adjusted each year to account for inflation.

The $11.4 million exclusion that we have in 2019 is a per person exclusion. If you are married, you have an exclusion, and your spouse also has an exclusion. This would bring the total exclusion up to $22.8 million for a couple.

Estate Tax Exclusion Portability

When a married couple accumulates assets, the sum total is going to be comprised of contributions from each individual in most cases. Since two different people contributed into the whole, you would assume that two exclusions should be available to apply to a couple’s estate.

The ability of a surviving spouse to use the exclusion that was allotted to his or her deceased spouse is called portability in legal lingo. Prior to 2011, the estate tax exclusion was not portable. A surviving spouse could not use his or her deceased spouse’s exclusion.

A tax relief act was passed at the end of 2010, and provisions contained within this act made the exclusion portable in 2011 and 2012, but there were no guarantees for 2013. However, the American Taxpayer Relief Act of 2012 was passed at the end of that year. This measure made the portability of the estate tax exclusion permanent.

To take advantage of the portability option, a representative of the estate has to submit Internal Revenue Service Form 706 within nine months of the passing of the decedent in question. However, if necessary, the IRS could be petitioned to grant an extension.

Capital Gains Tax

In addition to the federal estate tax and the matter of portability, we will look at the capital gains tax as it applies to the field of estate planning.

The capital gains tax is levied on the appreciation of assets. However, you do not have to pay the capital gains tax each year as the assets in question are appreciating. You would only have to pay the tax if you realize a capital gain. A capital gain is realized when the asset that has appreciated has been liquidated, and the gain has been pocketed.

The capital gains rate depends on a number of different factors. First off, there are long-term capital gains, and there are short-term capital gains, and they are taxed at different rates.

A short-term capital gain is a gain that is realized less than a year after the asset was acquired. The rate on short-term capital gains is equal to your regular income tax rate.

Long-term capital gains are gains that are realized more than a year after you originally took possession of the assets. The rate is either zero, 15%, or 20%, depending on your income level.

Step-Up in Basis

If you inherit assets that appreciated while they were in the possession of the decedent, you would not be required to pay the capital gains tax on the appreciation. You would get a step-up in basis. This means that for capital gains purposes, the value of the inherited assets would be equal to their value when you acquired them.

This is the good news, but the bad news is that you would be responsible for future gains if and when they are realized.

Download Our Free Estate Planning Worksheet!

If you would like to learn more about estate planning, download our carefully prepared worksheet. It is being offered free of charge right now, so you have everything to gain and nothing to lose if you obtain access to your copy. To do just that, visit our worksheet download page and follow this simple instructions.

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Stephen Unsworth
Stephen Unsworth
Stephen A. Unsworth is admitted to practice in both Vermont and Maine, and has more than 30 years of experience in estate planning and business law. His mission is to provide quality estate planning services, including assistance with Living Trusts, Wills, Medicaid Planning, Probate, Trust Administration, Powers of Attorney, Special Needs Planning, and Family Limited Partnerships.
Stephen Unsworth
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Filed Under: Uncategorized Tagged With: Estate Planning, estate tax portability, capital gains tax

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