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3 kinds of taxes that could diminish the impact of an estate

On Behalf of | Apr 2, 2024 | Estate Planning

Every person has their own unique goals in mind when they start developing an estate plan. For some people, the most important consideration is ensuring adequate protection for their children or other loved ones.

For others, establishing a charitable legacy might be a priority. Unfortunately, the tax obligations of an estate could get in the way of someone achieving either of those goals. Those living in Florida may need to consider taxes carefully when developing an estate plan. For example, if not properly accounted for, the following kinds of taxes could potentially reduce the impact that an estate has on someone’s chosen beneficiaries.

Estate taxes

The first thing that people often think about when discussing taxes during the probate process is the possibility of estate taxes, which some people refer to as death taxes. Florida does not collect an estate tax currently, but the federal government does. Anyone with personal property with a total value of $13.61 million or more could lose up to 40% of their estate to federal estate taxes.

Capital gains taxes

It is common for beneficiaries to sell off or liquidate part of their inheritance. The decision to convert investments or long-held resources to cash can lead to capital gains taxes. While the estate isn’t technically responsible for capital gains taxes, individual beneficiaries could be. Such taxes could diminish how much an inheritance impacts beneficiaries.

Income taxes

Often, the personal representative of an estate files an income tax return on behalf of the decedent. Even when someone did not have any income at the time of their death, it may be necessary to file a final return as a way of informing the IRS of their passing and resolving any outstanding income tax obligations. The estate itself might potentially have income tax liabilities if the decedent left instructions for the sale of certain assets as part of the estate administration process.

Those who engage in proper tax planning can minimize the impact of taxes on their estate and their beneficiaries. They can make certain moves that eliminate estate taxes or reduce what they owe. They can set aside resources for income tax obligations and take steps that could protect beneficiaries from capital gains taxes as well.

Testators planning their estates often need to think about taxes and other financial obligations when creating or updating their documents. As such, learning more about taxes and other concerns – and seeking legal guidance when necessary – may benefit those hoping to leave a positive legacy when they die.