Tax Law

Tax Consequences Related to Estate Planning

Tax Consequences Related to Estate Planning

After a lifetime of building wealth, you want to minimize any taxes at your death. While Virginia no longer has an estate or inheritance tax, there are still a number of federal tax implications that should be considered when developing an estate plan.

Larger estates may still be subject to a federal estate tax, and other taxes such as gift or generation skipping taxes may be applicable.  There are also other issues that may affect the amount that your heirs pay in taxes, including capital gains and stepped-up basis for assets.  In addition, any income that your estate or trust generates while it is being settled is subject to income taxes.

At Poole Brooke Plumlee, we have extensive experience in both estate planning and tax law.  The combination gives us unique insight into the tax implications of our client’s estate plans.  To learn more or to schedule a consultation with a Virginia Beach estate planning attorney, reach out to our law office today. 

What Taxes Might Apply to My Estate?

When people think of taxes on their estates, they typically consider two specific types of taxes: estate taxes and inheritance taxes.  While these terms are often used interchangeably, they refer to two different types of taxes.

An estate tax is a tax that is levied on a person’s estate before their assets are passed to their heirs.  It may also be referred to as a “death tax.”  By comparison, an inheritance tax is applied to a person’s heirs after an estate’s assets have been transferred to them.  With estate taxes, it is the estate that pays the tax, while a person’s heirs pay inheritance taxes.

Virginia no longer has an estate or inheritance tax.  You may have to pay an inheritance tax if you inherit property from a state – like Maryland – that does have this tax.

There is still a federal estate tax, however.  The asset threshold for the imposition of federal estate taxes is very high at $12,920,000 for 2023.  However, this large estate tax exemption will end in 2025 and beginning January 1, 2026, the exemption will reset to the $5 million threshold as adjusted for inflation since 2017.  This new threshold is estimated to be approximately $6.5 million. 

Beyond estate and inheritance taxes, you may be responsible for other types of taxes, such as a federal gift tax.  A gift tax applies if you give a person or charity more than $17,000 per year (or $34,000 gifting with your spouse).  However, the large estate tax exemption discussed above can used to offset gift taxes during life. Any annual gifts that exceed $17,000 must be reported on an annual gift tax return, even if no tax is due..

Similarly, the federal generation-skipping transfer (GST) tax applies in situations where a person transfers a substantial amount of assets – more than $12.92 million – to someone who is at least 37.5 years younger than them or two or more generations below their generation. The idea behind this is to close a loophole that wealthy families would sometimes use to transfer assets to grandchildren or other younger generations outright or in trust to avoid estate taxes at the level of the grandchild’s parents.

Virginia does have a probate tax.  This tax is assessed at .13 per $100 worth of assets (state and local combined) and imposed on any assets that pass through the probate process.  For example, if assets valued at $100,000 must be probated, then it will be subject to a $130 probate tax.  However, an estate planning attorney can advise you how to avoid probate of your assets at death.

There are other tax issues that can be implicated by estate planning. Capital gains taxes are imposed on profits made from selling an investment, which may affect your heirs if they sell an investment (such as property) that they inherited from you. Current law allows for the adjusted basis of property inherited to be “stepped up” to fair market value at the owner’s death. Thus, those “built in” capital gains are not subject to income tax at the owner’s death or when later sold by the beneficiary, unless the asset has appreciated since the owner’s death.

Finally, your estate or trust will be required to pay taxes on any income it generates while it is settled. For example, if your estate includes rental properties and it takes a year to probate your estate, then the estate will have to pay income taxes on the rental income generated during that time

How Can Estate Planning Help Minimize Taxes?

While Virginia does not have an estate or inheritance tax, there are a number of other tax issues that should be taken into consideration when drafting an estate plan. This is true for estates of all sizes – not just for people with higher levels of wealth.

There are a variety of strategies that can be employed to avoid or minimize taxes, including federal estate and gift taxes and Virginia probate taxes. For example, you may place your assets into a trust so that they are not subject to probate. Alternatively, you may plan your charitable giving or gifts to loved ones to reduce the value of your estate while staying within the bounds of the gift tax exemption.

A skilled Virginia Beach estate planning lawyer can work with you to put together a comprehensive estate plan that meets your needs – and helps you reduce any potential taxes on your estate and/or your heirs. Our legal team will analyze your situation, consult with you about your goals, and craft a plan that works for you.

How Our Law Firm Can Help

Few people want to think about the end of their life. Yet as the old adage goes, the only things that are certain in life are death and taxes. Having a smart estate plan can help you prepare for both of these matters to protect your interests and those of your heirs.

Based in Virginia Beach, Poole Brooke Plumlee works with clients throughout Virginia on issues related to both taxes and estate plans.  With decades of experience, we have in-depth knowledge of Virginia and federal law related to estates, trusts, probate, and taxation. To learn more or to schedule a consultation with a Virginia Beach estate planning lawyer, call us at 757-499-1841 or fill out our online contact form.

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