Category: Estate Tax

LLCs can Reduce Estate Taxes

LLCs can Reduce Estate Taxes

Family LLCs can be used to protect assets, reduce estate taxes and more efficiently shift income to family members, reports the article “Handling Estates Like An LLC Can Reduce Taxes” from Financial Advisor. The qualified business income and pass-through entity tax deductions may add significant benefits to the family.

What is a Family LLC? They are holding companies owned by two or more individuals, with two classes of owners: general partners (typically the parents) and limited partners (heirs). Contributed assets of the general partners are no longer considered part of their estate, and future appreciation on the assets are not counted as part of their taxable estate.

Consider the LLC as three separate pieces: control, equity and cash flow. Because of the separation, you can maintain control of the personal/business assets, while at the same time transferring non-controlling equity of the assets to someone else via a gift, a sale, or a combination of the two.

An added benefit—transfers of non-controlling equity can qualify for a discount on the value for tax reporting, minimizing any gift or estate tax consequences of the transfer. Discounting business entities with very liquid assets is generally not advisable. However, illiquid assets could warrant a discount as high as 40%.

These types of structures are complicated. Therefore, you’ll need an estate planning attorney with experience in how Family LLCs interact with estate planning. The LLC must be properly structured and have a legitimate business purpose.

It’s important to note that if a real estate or operating business is put into an LLC and taxed as a pass-through entity instead of a sole proprietorship, they may be eligible for the 20% discount under Section 199A, or for the pass—through entity tax workaround for the limitation of the deductibility of state taxes for individuals and trusts.

Every state has its own rules about income qualifying for a state income tax deduction on the federal level. If you have an entity in place, you’ll want to speak with your attorney to determine if a pass-through entity on the state level will be advantageous. If so, this election may allow for a state income tax deduction on the federal level.

Your estate planning attorney will help you get a qualified appraisal of the assets, since the IRS will require an accurate value of the transfer for reporting purposes, especially if a discount is being contemplated. LLCs can reduce estate taxes and protect your assets, but this is a complex matter. The estate planning and tax advantages to be gained make it worthwhile for families with a certain level of assets to protect. If you would like to learn more about LLCs and how they can benefit your estate planning, please visit our previous posts. 

Reference: Financial Advisor (April 4, 2022) “Handling Estates Like An LLC Can Reduce Taxes”

Photo by Rebrand Cities

 

The Estate of The Union Episode 14: Needle in a Haystack - Finding the right Caregiver is out now!

 

Read our Books

Portability can be used to Protect Farm

Portability can be used to Protect Farm

When one of the spouses dies, the surviving spouse can make what is known as a portability election. This means that any unused federal gift or estate tax exemption can be transferred from the deceased spouse to the surviving spouse. Portability can be used to protect the family farm.

Ag Web’s recent article entitled “It’s So Important to Elect ‘Portability’ for Your Farm Estate” explains that this is an election that has to be made proactively, after the death of the first spouse.

You’ll have to file a Form 706 federal estate tax return within two years of death at the latest, even though there’s no tax owed. Under current federal law, portability is available for farm couples to implement through the end of 2025. This the opportunity then “sunsets,” and the provision will no longer be available.

This could really be a multi-million-dollar mistake, if it’s not elected.

Even after two years, the surviving spouse can elect portability (through the end of 2025). However, he or she will incur considerable expense in the process.

You can still file for it, but you’ll pay a user fee that costs about $12,000. You’ll then have to pay an attorney to prepare the paperwork, and that’s probably another $10,000 to $15,000.

As a result, you’re going to pay between $25,000 and $50,000. However, if you’d just filed it within two years of your spouse’s death, you could have avoided those expenses.

Before portability was an option, it was common for husbands and wives to each own about the same amount of assets, or at least the amount of assets that could fully soak up and use each person’s exemption.

Therefore, many farm families are used to seeing farms titled one-half with the husband, one-half to the wife – as tenants in common not husband and wife jointly. That is because in the old days, if you didn’t use the wife’s exemption to cover her assets (if she died first), it would just expire.

Now, with portability, all the assets can flow through to the surviving spouse.

At the first spouse’s death, the survivor files that portability election and then has two exemptions to cover assets. Speak with an estate planning attorney to decide if portability can be used by your family to protect the farm for generations. If you would like to learn more about portability, and other strategies to protect the family farm or ranch, please visit our previous posts. 

Reference: Ag Web (April 18, 2022) “It’s So Important to Elect ‘Portability’ for Your Farm Estate”

 

The Estate of The Union Episode 14: Needle in a Haystack - Finding the right Caregiver is out now!

 

Read our Books

Gifting to your Loved Ones can reduce Taxes

Gifting to your Loved Ones can reduce Taxes

For wealthier Americans, gifting to your loved ones now can help you reduce or even avoid estate taxes when you die, say Kiplinger’s recent article entitled “Give Cash Now, Cut Your Estate Tax Later.”

Any gift may be subject to the federal gift tax, but you can give up to $16,000 per person during the year without having to file a gift tax return. If you are married, your spouse can also give $16,000 to the same people, upping the annual tax-free gift up to $32,000 per person.

Whatever you give away this year, up to the $16,000-per-recipient limit, will not be counted for estate tax purposes when you die.

If the current value of your estate is above the federal estate tax exclusion amount ($12.06 million for 2022), giving away money now could drop the value below the exclusion amount. The result would be no federal estate tax when you pass away.

There could also be state estate taxes to worry about. A dozen states and the District of Columbia have their own estate tax. Each currently has an exclusion amount that is far below the current federal standard (like just $1 million in Massachusetts and Oregon).

What happens if you are feeling extra generous and want to give more than $16,000 (or $32,000 per couple) to your fantastic 30-year-old niece this year?

You will be required to file a gift tax return (IRS Form 709), and the amount over $16,000 is potentially a taxable gift.

However, gifting to your loved ones can still reduce gift and estate taxes, if the total amount of taxable gifts so far over your lifetime is less than $12.06 million.

Therefore, if you are thinking of dropping a very large amount of cash in the hands of your niece (or whomever), it does not necessarily mean you will have to pay taxes on the gift.

For strategies about gift giving, speak with an experienced estate planning attorney. If you would like to learn more about reducing your tax burden, please visit our previous posts. 

Reference: Kiplinger (Dec. 2, 2021) “Give Cash Now, Cut Your Estate Tax Later”

 

Photo by August de Richelieu

 

The Estate of The Union Episode 14: Needle in a Haystack - Finding the right Caregiver is out now!

 

Read our Books

Bypass Trust gives Flexibility in managing Taxes

Bypass Trust gives Flexibility in managing Taxes

A bypass trust gives more flexibility in managing taxes. A bypass trust removes a designated portion of an IRA or 401(k) proceeds from the surviving spouse’s taxable estate, while also achieving several tax benefits, according to a recent article titled “New Purposes for ‘Bypass’ Trusts in Estate Planning” from Financial Advisor.

Portability became law in 2013, when Congress permanently passed the portability election for assets passing outright to the surviving spouse when the first spouse dies. This allows the survivor to benefit from the unused federal estate tax exemption of the deceased spouse, thereby claiming two estate tax exemptions. Why would a couple need a bypass trust in their estate plan?

  • The portability election does not remove appreciation in the value of the ported assets from the surviving spouse’s taxable estate. A bypass trust removes all appreciation.
  • The portability election does not apply if the surviving spouse remarries, and the new spouse predeceases the surviving spouse. Remarriage does not impact a bypass trust.
  • The portability election does not apply to federal generation skipping transfer taxes. The amount could be subject to a federal transfer tax in the heir’s estates, including any appreciation in value.
  • If the decedent had debts or liability issues, ported assets do not have the protection against claims and lawsuits offered by a bypass trust.
  • The first spouse to die loses the ability to determine where the ported assets go after the death of the surviving spouse. This is particularly important when there are children from multiple marriages and parents want to ensure their children receive an inheritance.

This strategy should be reviewed in light of the SECURE Act 10-year maximum payout rule, since the outright payment of IRA and 401(k) plan proceeds to a surviving spouse is entitled to spousal rollover treatment and generally a greater income tax deferral.

Bypass trusts are also subject to the highest federal income tax rate at levels of gross income of as low as $13,550, and they do not qualify for income tax basis step-up at the death of the surviving spouse.

However, the use of IRC Section 678 in creating the bypass trust can eliminate the high trust income tax rates and the minimum exemption, also under Section 678, so the trust is not taxed the way a surviving spouse would be. There is also the potential to include a conditional general testamentary power of appointment in the trust, which can sometimes result in income tax basis step-up for all or a portion of the appreciated assets in the trust upon the death of the surviving spouse.

A bypass trust gives more flexibility in managing taxes. Every estate planning situation is unique, and these decisions should only be made after consideration of the size of the IRA or 401(k) plan, the tax situation of the surviving spouse and the tax situation of the heirs. An experienced estate planning attorney is needed to review each situation to determine whether or not a bypass trust is the best option for the couple and the family. If you would like to learn more about bypass trusts, please visit our previous posts.

Reference: Financial Advisor (Feb. 1, 2022) “New Purposes for ‘Bypass’ Trusts in Estate Planning”

Photo by ANTONI SHKRABA from Pexels

 

The Estate of The Union Episode 14: Needle in a Haystack - Finding the right Caregiver is out now!

 

www.texastrustlaw.com/read-our-books

 

A trust provides more flexibility than a will

A Trust provides more flexibility than a Will

A trust is defined as a legal contract that lets an individual or entity (the trustee) hold assets on behalf of another person (the beneficiary). The assets in the trust can be cash, investments, physical assets like real estate, business interests and digital assets. There is no minimum amount of money needed to establish a trust. A trust provides more flexibility than a will.

US News’ recent article entitled “Trusts Explained” explains that trusts can be structured in a number of ways to instruct the way in which the assets are handled both during and after your lifetime. Trusts can reduce estate taxes and provide many other benefits.

Placing assets in a trust lets you know that they will be managed through your instructions, even if you’re unable to manage them yourself. Trusts also bypass the probate process. This lets your heirs get the trust assets faster than if they were transferred through a will.

The two main types of trusts are revocable (known as “living trusts”) and irrevocable trusts. A revocable trust allows the grantor to change the terms of the trust or dissolve the trust at any time. Revocable trusts avoid probate, but the assets in them are generally still considered part of your estate. That is because you retain control over them during your lifetime.

To totally remove the assets from your estate, you need an irrevocable trust. An irrevocable trust cannot be altered by the grantor after it’s been created. Therefore, if you’re the grantor, you can’t change the terms of the trust, such as the beneficiaries, or dissolve the trust after it has been established.

You also lose control over the assets you put into an irrevocable trust.

Trusts provide you with more flexibility to control your assets than a will does. With a trust, you can set more particular terms as to when your beneficiaries receive those assets. Another type of trust is created under a last will and testament and is known as a testamentary trust. Although the last will must be probated to create the testamentary trust, this trust can protect an inheritance from and for your heirs as you design.

Trusts are not a do-it-yourself proposition: ask for the expertise of an experienced estate planning attorney. If you would like to read more about trusts, please visit our previous posts.

Reference: US News (Feb. 7, 2022) “Trusts Explained”

Photo by Pavel Danilyuk from Pexels

 

The Estate of The Union Episode 14: Needle in a Haystack - Finding the right Caregiver is out now!

 

www.texastrustlaw.com/read-our-books

 

 

Filing taxes when a loved one passes

Filing Taxes when a Loved One passes

Filing taxes when a loved one passes is difficult. If you are preparing a 1040 federal income tax form for a spouse or parent, you are grieving while also gathering tax records. If you are the executor for an estate, you may not know the history of the decedent’s tax situation nor have the access you need to important documents. To help alleviate the problems, AARP’s January 27th article entitled, “How to File a Tax Return for a Deceased Taxpayer,” gives some guidance on how a decedent’s tax return might be different from the usual 1040 form, as well as the pitfalls to avoid as you prepare to file.

  1. Marital filing status. A surviving spouse should file a joint return for the year of death and write in the signature area “filing as surviving spouse.” The spouse also can file jointly for the next two tax years if he or she has dependents and has not remarried. This special provision gives the surviving spouse benefit from the advantages of a joint return, such as the higher standard deduction.
  2. Get authorization to file. If there is no surviving spouse, someone must be chosen to file the tax return. This could be the estate’s executor if there was a will, the estate administrator if there is not a will, or anyone responsible for managing the decedent’s property. To prepare the return — or provide necessary information to an accountant — you will need to access the decedent’s financial records, and financial institutions usually want to see a copy of the certified death certificate before releasing information.
  3. Locate last year’s return. That is your starting point. Returns filed electronically must have the password to sign into the software program that was used. A major step in estate planning is, therefore, to give passwords to a trusted person or instructions about how to access that information after your death. However, if you cannot find last year’s return, submit Form 4506-T to the IRS to request a transcript of the previous tax return. This shows what was on the return, including filing status, taxable income, tax payments and more. The IRS also can provide source documents, such as a W-2 or a 1099-INT from a bank or a 1099-R for a pension distribution from a union — all the documents sent to the IRS on your behalf — which can help you know what documents to collect now.
  4. Update the address on the return. If you are not a surviving spouse or did not live with the decedent, be sure to update the tax return to list your address as an “in care of” address, so anything from the IRS will come directly to you.
  5. Review medical costs. The deduction for medical expenses is the amount that exceeds 7.5% of adjusted gross income. If the decedent was chronically ill, medical expenses can add up. Hospital stays, nursing homes, prescriptions and care from aides can add up and hit that threshold.
  6. Get extra time to file and/or make payments. The executor or surviving spouse can request an extension and estimate what any tax liability might be. The IRS may also give you a break on penalties for not filing because you were dealing with funeral arrangements, for example, but you have to cite a reasonable cause.
  7. Cut down the IRS’ time to assess taxes. The IRS has three years to decide if you have paid the right amount for that tax year. You can cut that to 18 months, by filing Form 4810. That is a request for a prompt assessment of tax. As you prepare the return, you may miss a 1099 or other document, unintentionally understating income. If you skip filing Form 4810, the IRS could notify you of taxes owed up to three years later, likely after you have distributed the estate’s funds.
  8. You may be filing multiple returns. If a loved one passes in January or February, you may be responsible for filing taxes for last year and this year. There might be a filing obligation for that brief period of time that the person was alive in this year. The other situation is that the decedent failed to file a previous year’s return, perhaps because he or she was very ill. A notice will be sent from the IRS stating that they do not have a copy of the decedent’s return. This is another reason it is important to file Form 4810, requesting that the IRS has only 18 months to assess tax. You do not want any surprises. A tax return, or Form 1041, also may need to be filed for the estate, if it has earned more than $600. Since it can take a long time to wind down an estate and pay heirs, a Form 1041 may need to be filed the following year, too — a healthy brokerage account could generate more than $600 income for the year. It may also take a long time to distribute the estate.
  9. Estate taxes. An estate tax return, Form 706, must be filed if the gross estate of the decedent is valued at more than $12.06 million for 2022 or $11.7 million for 2021. However, that is a high threshold.
  10. Consider hiring an attorney. If filing taxes when a loved one passes away sounds like it is too much to handle, ask an attorney for help. A legal professional will know what information is required.

If you would like to learn more about estate and tax planning, please visit our previous posts. 

Reference: AARP (Jan. 27, 2022) “How to File a Tax Return for a Deceased Taxpayer”

Photo by Pavel Danilyuk from Pexels

 

The Estate of The Union Episode 14: Needle in a Haystack - Finding the right Caregiver is out now! 

 

www.texastrustlaw.com/read-our-books

The Estate of The Union Season 2 premiere - Millennials’ Mysteries Uncovered Part 2

The Estate of The Union Episode 12 is out now!

The Estate of The Union Episode 12 is out now!

This is the traditional time for giving. Giving to a cause and giving of ourselves.

The newest episode of The Estate of The Union focuses on the topic of charitable giving. Brad chats with Stacey Wedding, an expert on charitable giving, about how it can play a role in your planning strategy and help the people and organizations that have meaning in your life. They discuss both the How and the Why of giving – and Stacy will share tips on becoming a smarter giver too!

Laws concerning charitable giving can change, so be sure your gifting strategies are still appropriate for your estate. Charitable remainder trusts (CRTs) and Donor Advised Funds (DAFs) are options for people who are already charitably inclined to reduce estate taxes. Charitable Remainder Trust can reduce taxes for people who would be making gifts to support meaningful causes. DAFs can be created and funded by individuals or a family and receive a deduction that very same year.

In each episode of The Estate of The Union podcast, host and lawyer Brad Wiewel will give valuable insights into the confusing world of estate planning, making an often daunting subject easier to understand.

It is Estate Planning Made Simple!

To learn more about Stacey Wedding and the Stacey Wedding Group, please visit her website:

 

www.staceywedding.com

 

The Estate of The Union episode 12-Giving Yourself Away can be found on Spotify, Apple podcasts, or anywhere you get your podcasts. Please click on the link below to listen to the new installment of The Estate of The Union podcast. You can also view this podcast on our YouTube page. The Estate of The Union Episode 12 out now. We hope you enjoy it.

Estate of The Union Episode 11-Millennials’ Mysteries Uncovered!

 

Texas Trust Law/Texas Trust Law focuses its practice exclusively in the area of wills, probate, estate planning, asset protection, and special needs planning. Brad Wiewel is Board Certified in Estate Planning and Probate Law by the Texas Board of Legal Specialization. We provide estate planning services, asset protection planning, business planning, and retirement exit strategies.

Consider Gifting to Loved Ones before Tax changes

With all of the talk about changes to estate taxes, estate planning attorneys have been watching and waiting as changes were added, then removed, then changed again, in pending legislation. The passage of the infrastructure bill in early November may mark the start of a calmer period, but there are still estate planning moves to consider, says a recent article “Gift money now, before estate tax laws sunset in 2025” from The Press-Enterprise. It is wise to consider gifting to loved ones before tax changes arrive.

Gifts are used to decrease the taxes due on an estate but require thoughtful planning with an eye to avoiding any unintended consequences.

The first gift tax exemption is the annual exemption. Basically, anyone can give anyone else a gift of up to $15,000 every year. If giving together, spouses may gift $30,000 a year. After these amounts, the gift is subject to gift tax. However, there’s another exemption: the lifetime exemption.

For now, the estate and gift tax exemption is $11.7 million per person. Anyone can gift up to that amount during life or at death, or some combination, tax-free. The exemption amount is adjusted every year. If no changes to the law are made, this will increase to roughly $12,060,000 in 2022.

However, the current estate and gift tax exemption law sunsets in 2025. This will bring the exemption down from historically high levels to the prior level of $5 million. Even with an adjustment for inflation, this would make the exemption about $6.2 million. This will dramatically increase the number of estates required to pay federal estate taxes.

For households with net worth below $6 million for an individual and $12 million for a married couple, federal estate taxes may be less of a worry. However, there are state estate taxes, and some are tied to federal estate tax rates. Planning is necessary, especially as some in Congress would like to see those levels set even lower.

Let’s look at a fictional couple with a combined net worth of $30 million. Without any estate planning or gifting, if they live past 2025, they may have a taxable estate of $18 million: $30 million minus $12 million. At a taxable rate of 40%, their tax bill will be $7.2 million.

If the couple had gifted the maximum $23.4 million now under the current exemption, their taxable estate would be reduced to $6.6 million, with a tax bill of $2,520,000. Even if they were to die in a year when the exemption is lower than it was at the time of their gift, they’d save nearly $5 million in taxes.

There are a number of estate planning gifting techniques used to leverage giving, including some which provide income streams to the donor, while allowing the donor to maintain control of assets. These include:

Discounted Giving. When assets are transferred into an entity (commonly a limited partnership or limited liability company), a gift of a minority interest in the entity is generally given a discounted value, due to the lack of control and marketability.

Grantor Retained Annuity Trusts. The donor transfers assets to the trust and retains right to a payment over a period of time. At the end of that period, beneficiaries receive the assets and all of the appreciation. The donor pays income tax on the earnings of the assets in the trust, permitting another tax-free transfer of assets.

Intentionally Defective Grantor Trusts. A donor sets up a trust, makes a gift of assets and then sells other assets to the trust in exchange for a promissory note. If this is done correctly, there is a minimal gift, no gain on the sale for tax purposes, the donor pays the income tax and appreciation is moved to the next generation.

These strategies may continue to be scrutinized as Congress searches for funding sources, but in the meantime, they are still available and may be appropriate for your estate. Speak with an experienced estate planning attorney to see if these or other strategies should be put into place. It is time to seriously consider gifting to loved ones before estate tax changes arrive. If you would like to learn more about gifting, and other charitable options in estate planning, please visit our previous posts.

Reference: The Press-Enterprise (Nov. 7, 2021) “Gift money now, before estate tax laws sunset in 2025”

Photo by Anastasia Shuraeva from Pexels

 

Estate of The Union Episode 11-Millennials’ Mysteries Uncovered!

 

www.texastrustlaw.com/read-our-books

providing financial security to your heirs

Providing Financial Security to your Heirs

AARP’s recent article “6 Ways to Pass Wealth to Your Heirs” says that providing financial security to your heirs after you’re gone is a goal you can reach in a number of ways.

Lets’ look at a few common options, along with their pluses and minuses:

  1. 401(k)s and IRAs. These grow tax-free while you’re alive and will continue tax-free growth after your beneficiaries inherit them. Certain heirs, such as spouses and people with disabilities, can hold these accounts over their lifetime. Withdrawals from Roth IRAs and Roth 401(k)s are nearly always tax-free. However, other heirs not in those categories have to empty these accounts within 10 years.
  2. Taxable accounts. Heirs now get a nice tax break on investments that have grown in value over time. Say that years ago you bought stock for $300 that now trades for $3,000. If you sold it now, you’d owe taxes on $2,700 in capital gains. However, if your son inherited the stock when it was trading at $3,000 and sold it at that price, he’d owe no taxes on the sale. However, note that the Biden administration has proposed limiting the amount of investment capital gains free from taxes in this situation, which could impact wealthier families.
  3. Your home. If you own a home, it’ll typically be the most valuable non-financial asset in your estate. Heirs might not have to pay capital gains tax on it, if they sell it. However, use caution: whoever inherits the home will have to cover large expenses, such as upkeep and taxes.
  4. Term life insurance. This can be a great tool for loved ones who depend on your income or rely on your unpaid caregiving. You can get a lot of coverage for very little money. However, if you purchase plain-vanilla term insurance and don’t die while the policy is in force, you don’t get the money back.
  5. Whole life insurance. These policies provide a guaranteed death benefit for heirs and a cash-value component you can access for emergencies, long-term care, or other needs. However, these policies are more expensive than term insurance.
  6. Annuities. A joint-and-survivor annuity guarantees the survivor (your spouse, perhaps) a steady stream of income for life. Annuities with a death benefit can provide a lump sum for a beneficiary. However, while you’re alive, annual fees for variable annuities can be high, limiting potential returns. Moreover, cashing in your annuity for a lump sum may be expensive or impossible.

Bonus Tip. Discuss your plans with your children sooner rather than later, especially if you are leaving them different amounts or giving a large sum to a favorite cause, so you have time to explain your rationale. Work with an estate planning attorney who can help structure your planning to ensure you are providing financial security to your heirs. If you would like to learn more about estate planning and managing generational wealth, please visit our previous posts. 

Reference: AARP (Sep. 9, 2021) “6 Ways to Pass Wealth to Your Heirs”

The Estate of The Union Episode 10

 

www.texastrustlaw.com/read-our-books

What Is Income in Respect of Decedent?

What Is Income in Respect of Decedent?

What Is Income in Respect of Decedent? One of the tasks required after a person’s death is to pay taxes on their entire estate and often for the last year of their life. Most people know this, but not everyone knows taxes are also due on any income received after a person has died. Known as Income In Respect Of A Decedent or IRD, this kind of income has its own tax rules and they may be complex, says Yahoo! Finance in a recent article simply titled “Income in Respect of a Decedent (IRD).”

Income in respect of a decedent is any income received after a person has dies but not included in their final tax return. When the executor begins working on a decedent’s personal finances, things could become challenging, especially if the person owned a business, had many bank and investment accounts, or if they were unorganized.

What kinds of funds are considered IRDs?

  • Uncollected salary, wages, bonuses, commissions and vacation or sick pay.
  • Stock options exercised
  • Taxable distributions from retirement accounts
  • Distributions from deferred compensation
  • Bank account interest
  • Dividends and capital gains from investments
  • Accounts receivable paid to a small business owned by the decedent (cash basis only)

As a side note, this should serve as a reminder of how important it is to create and update a detailed list of financial accounts, investments and income streams for executors to work with to prevent possible losses.

How is IRD taxed? IRD is income that would have been included in the decedent’s tax returns, if they were still living but wasn’t included in the final tax return. Where the IRD is reported depends upon who receives the income. If it is paid to the estate, it needs to be included on the fiduciary return. However, if IRD is paid directly to a beneficiary, then the beneficiary needs to include it in their own tax return.

If estate taxes are paid on the IRD, tax law does allow for an income tax deduction for estate taxes paid on the income. If the executor or beneficiaries missed the IRD, an estate planning attorney will be able to help amend tax returns to claim it.

Retirement accounts are also impacted by IRD. Required Minimum Distributions (RMDs) must be taken from IRA, 401(k) and similar accounts as owners age. The RMDs for the year a person passes are also included in their estate. The combination of estate taxes and income taxes on taxable retirement accounts can reduce the size of the estate, and therefore, inheritances. Tax law allows for the deduction of estate taxes related to amounts reported as IRD to reduce the impact of this “double taxation.” Understanding Income in Respect of Decedent can prevent some major headaches for your loved ones after you pass. If you would like to learn more about IRDs, and other aspects of probate and trust administration, please visit our previous posts. 

Reference: Yahoo! Finance (Oct. 6, 2021) “Income in Respect of a Decedent (IRD)”

Photo by Anna Nekrashevich from Pexels

The Estate of The Union Episode 10

 

www.texastrustlaw.com/read-our-books

Information in our blogs is very general in nature and should not be acted upon without first consulting with an attorney. Please feel free to contact Texas Trust Law to schedule a complimentary consultation.
Categories
View Blog Archives
View TypePad Blogs