Call Today – 386.320.6169

Tax Considerations and Estate Planning

April 01

Estate Planning: Tax Considerations to Be Aware Of

Written by Thomas Upchurch

Estate planning offers many benefits, one of which is the reduction or elimination of taxes. Through proper planning, it is possible to eliminate or reduce the tax burden on one’s beneficiaries. When crafting an estate plan, taxes should be a primary focus. Whether you are considering executing an estate plan or you have been named the personal representative of an estate in Florida, you must consider the taxes that may be levied against the estate. In this article, we examine tax considerations during the estate planning process. 

Florida Tax Considerations

Estate tax, also called death tax, is a financial obligation that is levied on the estate of a deceased person. This type of tax is typically only applied to estates that are worth above a certain amount, and this can vary depending on the location of the estate. Inheritance taxes, on the other hand, are levied on the money inherited by the beneficiary of an estate. Fortunately, Florida residents and their heirs do not owe either of these types of taxes to the state of Florida. However, depending on the size of the estate in question, an estate in Florida may still owe federal tax.

Federal Tax Considerations

As noted above, Florida does not tax estates or beneficiaries who inherit assets from an estate. The federal government, however, imposes a tax on estates that meet certain requirements. Luckily, the federal estate tax only applies if the value of the entire estate is in the tens of millions of dollars (this amount is doubled for married couples), and the tax that is incurred in such cases is paid out of the estate rather than by the beneficiaries. With the federal death tax level being so high, very few people need to worry about it.

Tax Considerations for Inheritances

Although the state of Florida doesn’t generally impose inheritance taxes on beneficiaries, there are some situations in which beneficiaries may have to pay some form of tax on inheritances.

For example, a beneficiary may have to pay taxes on an inheritance under the following circumstances:

The beneficiary withdraws funds from a retirement account. Although taxes don’t apply to the inheritance or transfer of a 401k, an IRA, an annuity, or other qualified plans, taxes can be levied when funds from these accounts are withdrawn following the account holder’s death. In addition, benefits received from some investment accounts and pension plans may be taxable. 

The beneficiary receives income from the estate. If a beneficiary receives property from an estate that generates income, the income received before the property is transferred may be subject to taxation. 

The beneficiary sells inherited assets. Income taxes don’t apply to property that is received directly from an estate. However, if a beneficiary sells inherited property, then the funds he or she receives may be subject to federal income tax if the asset appreciated after the decedent’s passing. 

The beneficiary inherited from a non-U.S. citizen. There may be tax consequences for a beneficiary if the decedent is not a U.S. citizen. If a person is not a permanent resident of the U.S., but he or she owns property in Florida, the property may be taxed upon his or her death, and certain non-citizen beneficiaries may not be able to inherit the property without tax consequences. 

Estate Planning Tax Benefits

As noted above, many tax obligations can be reduced or eliminated through the estate planning process. There are several tools that can accomplish this, the most popular of which is a trust. 

Trusts

It is possible to reduce or even eliminate estate taxes by gifting assets into an irrevocable trust for eventual transfer to one’s beneficiaries or to one or more charities. By placing assets into an irrevocable trust, a person ceases to legally own them. As a result of this lack of ownership, the assets in the trust don’t contribute to the trustor’s taxable estate after his or her death. Of course, this comes with a tradeoff: placing assets in an irrevocable trust is a permanent decision, and as noted above, when a party places assets in an irrevocable trust, he or she relinquishes ownership of those assets. 

A revocable trust, on the other hand, allows an estate to avoid probate, but not taxes. The IRS takes the position that the person who creates a revocable trust still owns the assets that he or she places into such a trust. Therefore, while revocable trusts offer certain advantages, such as added control of assets in the trust, they don’t provide the tax benefits of irrevocable trusts. 

Fortunately, it isn’t necessary to place all of one’s assets into a trust. For example, if a party owns some significant assets that he or she wishes to transfer to a certain beneficiary, then he or she can place them into an irrevocable trust and maintain control over his or her other non-trust property.

Life Insurance 

An additional way to reduce the taxes levied against an estate is with a life insurance policy. By themselves, life insurance proceeds are exempt from federal income taxes when they are paid to a beneficiary. However, when the proceeds are included as part of one’s taxable estate, they may be subject to taxation. One way to ensure that doesn’t happen is to transfer ownership of the policy to another person or entity, including the beneficiary of the policy. In addition, a life insurance policyholder may create an irrevocable life insurance trust to reduce or eliminate tax consequences. 

Contact an Attorney 

If you need assistance with the estate planning process in Florida, Upchurch Law is here to help. At Upchurch Law, lawyer Thomas Upchurch is available to assist you with all your estate-related needs, including crafting an estate plan that will reduce or eliminate the tax obligations of your estate and beneficiaries. Upchurch Law services the central and north Florida areas, including Orlando, Tampa, St. Petersburg, Deland, Daytona Beach, Jacksonville, Port Orange, Ormond Beach, Palm Coast, Saint Augustine, and Titusville. If you are ready to begin planning for the future, please contact us as soon as possible to schedule a free initial consultation with a knowledgeable and experienced attorney.

Frequently Asked Questions

What is estate tax?

Estate tax is a tax on the transfer of a person’s property and assets after his or her death. This type of tax is also commonly called death tax. If the total value of one’s estate is above a certain amount, then the IRS levies a tax on it before any estate assets can be passed on to beneficiaries. The state of Florida, however, does not impose this type of tax on estates. 

How much is inheritance tax?

Some states impose a tax on the recipients of inherited assets. However, Florida does not impose inheritance taxes on beneficiaries, which means that the rate for such taxes in the state of Florida is zero. When a Florida resident dies, his or her estate and heirs do not owe any taxes on the inheritance to the state of Florida. 

Will my heirs have to pay tax on their inheritance?

Some states impose inheritance taxes on beneficiaries. Fortunately, Florida does not have a state inheritance tax. Additionally, beneficiaries and heirs in Florida do not pay income tax on property and funds received from an estate because inherited property does not count as income for the purpose of assessing federal income tax (and Florida does not impose an income tax).

What happens if I die without a will?

A person who dies without a will in the state of Florida is said to have died intestate. Intestate property is property that has not been addressed in a will. Florida intestacy law is the default mechanism by which property is distributed that was not properly devised by a will. If you die without a will in Florida, then your property that is subject to Florida’s intestacy statutes must pass through the probate process. Probate is a court-supervised process for obtaining the assets of a decedent, paying the decedent’s debts, and distributing the decedent’s assets to his or her beneficiaries. 

Will a living trust affect estate taxes?

A living trust in Florida will usually not affect taxes levied on an estate. As noted above, federal estate tax is levied only on extremely valuable estates, and Florida does not impose such a tax. Therefore, a living trust is unlikely to have any effect on most Florida residents. However, those with significant estates should consult with an attorney for questions regarding the effectiveness of living trusts on their tax obligations. 

What is portability?

Portability is a provision of federal tax law that allows a surviving spouse to use any unused estate and gift tax exemptions after the death of his or her spouse. Portability can be used by a surviving spouse to protect him or her from having to pay steep estate or gift taxes upon the death of his or her spouse.