How to Prepare for Estate Taxes


Even if your assets are not the greatest, you want to know about estate taxes in your state – because it’s not only federal estate tax that can take a big chunk of your heirs’ inheritance but also the state taxes.

We put together some important info on estate taxes, and how you can prepare for them so they will be covered after your death, instead of becoming the responsibility of your beneficiaries.

IRS estate taxes are taxes on the privilege of transferring property to the deceased heirs, and an inheritance tax is a tax on the privilege of receiving property from a deceased benefactor.

The heir is responsible for paying an inheritance tax – it’s not the estate of the deceased, are it’s levied at the federal level. There is a federal estate tax and a state estate tax in some states.

Since 2013, the IRS estate tax exemption has been indexed for inflation; but it took a big jump for 2018 due to the new tax plan that President Trump signed in December 2017. The current federal estate tax rate is 40%.

If your estate is within the estate tax limits, and your intention is to leave the maximum amount of your assets to your heirs – some thorough estate tax planning is needed.

If you want to minimize the amount of your estate tax, you may want to get professional guidance as to how to reduce your assets, such as through a charitable donation (to be deducted at tax time), and giving to your heirs. If you give up to $15,000 a year, it is considered the annual gift tax exclusion. Each single filer or member of a married couple can give up to $15,000, to as many people as they want. If the gift amount is more than $15,000 to any one beneficiary, then the federal gift tax rate has to be paid, which is 40%, the same as the estate tax rate.

There are cases where the estate of a deceased accumulates income, known as Income in Respect of Decedent (IRD). It can be for a property sale that hasn’t gone through by the time the owner dies. If the estate is large, it might face double taxation at the federal level – first, the regular estate tax and second, the income tax on the IRD. The estate tax deduction ensures that the same assets are not taxed twice.

The federal estate tax affects cash, real estate, stock, or other assets that are transferred from a deceased person to his or her heirs.

Certain U.S. states, including New York, are levy estate taxes, which means that the estates of people who live there and whose assets are above the threshold for taxation will be taxed at both the federal and state level.

If you live in one of the states that have its own estate tax, less money will go to your heirs – so your beneficiaries have even more to gain from thoughtful estate planning and advanced gift making.

If you’re the person who’s in charge of paying estate taxes for someone who passed away, you may want to consider hiring a tax accountant and an estate lawyer to help you handle it the best way. In addition to estate taxes, separate income taxes may need to be filed for the deceased if his or her estate is generating income above IRS limits. To file a U.S. estate tax return, you’ll need to know the federal Taxpayer Identification Number (or TIN), which will be either an Employer Identification Number (EIN) for estate and trust returns or the decedent’s Social Security number (SSN) for his or her final Form 1040.

If you need to open a bank or brokerage account for an estate, you will need to apply for a TIN; this alerts the IRS that a new trust or estate exists – and tax returns from that entity will be expected even if there’s no obligation to file one.

You can wait for an IRS notice asking for a tax return and send a letter explaining that the estate did not have enough income to file; or, to avoid receiving such a notice altogether, prepare and file a return showing no income.

Seeking advice on when to file may be beneficial, because depending on how much income and when the estate stands to receive, using a different year-end could make a considerable difference in the total income tax. This is especially the case when the estate’s administration takes more than 12 months from start to finish. Creating a schedule of when and how much income you anticipate the estate to receive is a wise thing to do. An estate may select the last day of any month as its tax year-end, as long as the first year includes no more than 12 months.

Tax considerations are a very important issue to consider, since a properly prepared will can minimize tax liability.

It is always advisable to consult with a professional regarding your estate, inheritance, and gift taxes on both the federal and state levels.

At the Levin Law Group, our experienced wills and trusts lawyers in New York will assist you in advising and preparing a wide range of wills and estate planning documents.

Take steps today to ensure your wishes, interests and assets are protected – contact Levin Law Group New York wills and trust attorney regarding estate law.