When I meet with clients to discuss their estate planning or when counseling a family after the passing of a loved one, the topic of taxes normally arises. Most clients assume that there will be a huge tax bill that needs to be paid, however, many clients are pleasantly surprised by their actual tax burden (or lack thereof).
The tax that strikes the most fear in people’s hearts is the estate tax (i.e. the death tax). Over the past 20 years the number of estates that pay this tax has fallen dramatically. In fact, about 99.8% of estates pay NO estate taxes. Why? First, Ohio abolished its estate tax in 2013, and Ohio does not have an inheritance tax, which would be a tax on individuals receiving the monies. Next, the Federal government has set the estate tax exemption amount to $5.45 million, per person. What this means is that if you pass with total assets less than $5.45 million, you will pay no federal estate tax.
Another potential tax facing an family is capital gains. However, again, the capital gains tax is mostly all bark and no bite. First, capital gains are typically only imposed upon real estate and stock or brokerage accounts. Capital gains is a calculation whereby you take the current value of the asset and subtract from it what the asset was purchased for. As an example, if your home is worth $150,000 and you purchased it for $50,000, you have a capital gain of $100,000. If you decide to give this property to your child sometime before your death (possibly to avoid probate or a Medicaid spenddown), your child will have to pay a capital gains tax on that $100,000 when he or she ultimately sells it. However, if your child inherits the property upon your death, then the IRS wipes out the gain and no tax will be due (provided the property is sold relatively quickly).
The last tax that actually could be a detriment to your heirs is the income tax waiting to be paid on any tax deferred accounts. These types of account are usually a 401(k), traditional IRA or some annuities. When the holder passes, the income tax that you have been avoiding all these years will now come due. However, there are several good options that your beneficiaries may choose to minimize the taxes paid. But, in order to take advantage of these options, either an individual or a qualified trust must be made the beneficiary.
So, I’m sorry to tell you that in many cases the tax man (or women!) may not come a calling upon your death. However, it is still a good idea to consult a qualified estate planning attorney or certified public accountant to discuss your particular estate in more detail.