Hi there, my name is Miranda Dressler, attorney with MacKay Dressler Law Firm located in Petaluma, California. And today we’re gonna be talking about or answering a question that we get pretty often, which is, does an estate plan affect my taxes? And the short answer is yes, but maybe not in the way you necessarily think.
The first thing is that estate planning is in relation to, you know, it affects taxes sometimes, or it’s related to taxes, but estate planning is not just about taxes. Estate planning is primarily about making sure that you have designated decision makers, right? So, in the event that you become unable to make your own decisions, whether that’s because of incapacity or death, that you’ve designated someone that you’ve chosen to step in and make those decisions for you. And it’s also about to whom you leave your assets at your death. And can it affect your taxes? Yeah, there’s a few different taxes or tax issues that can come into play when we’re talking about estate planning.
The first being estate taxes.
So, depending on the size of your estate, meaning the total value of your assets, there can be a federal estate tax and sometimes a state estate tax that can be levied or due on your estate after you pass away. If a person is at the level, the value level, that this becomes a concern, doing proper estate planning through trusts, et cetera, can reduce or even eliminate estate taxation.
There’s also the issue of income taxes, and particularly, usually not for yourself, but perhaps for your future beneficiaries after you pass away. The way that you set up your estate plan can affect and impact how much taxes your beneficiaries may pay.
There’s also the question of capital gains taxes, because at death, most assets are in estate plans, the assets that are being passed on often receive what’s called a step-up in income tax basis, which is a tax benefit. So, how the estate plan though is drafted can really affect whether that benefit is available or not.
It’s also really important to note that not everyone, and probably most people are not gonna be, at this point, are not gonna be subject to estate taxes at their death. Because the amount of money, what’s called the estate tax exemption amount, the amount of money that you can have when you die before any estate tax would be imposed, is currently really quite high. It’s about $15 million a person right now, which is gonna be increased for inflation every year. So, unless something really drastic in the law changes, for most people, estate taxes are really not a concern.
But even if estate taxes or other taxes aren’t a big concern for you, a well-drafted estate plan, like I mentioned at the beginning, can do a lot. You still should have one, right? It can avoid a court proceeding becoming necessary at your incapacity and at your death. It can therefore reduce the administrative costs apart from taxes, prevent family disputes, you know. You can protect inheritances in different ways, going on down to children or other beneficiaries. And so, you know, estate taxes or taxes in general and estate planning really do go hand in hand. It’s something always we want to touch on and discuss when we’re putting together an estate plan. But it really, how it might affect you, how it might affect your plan, really depends on your specific situation, family, goals, et cetera.
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