This is a very common question that I answer nearly everyday. However, there are several different taxes and multiple tax issues that could affect your family at your death. The first and most common type of tax is commonly referred to as the death tax. In Tennessee, the death tax (referred to as the Tennessee Inheritance Tax) was repealed on January 1, 2016, therefore, there is no death tax in Tennessee. However, there is still a federal death tax (referred to as the Unified Federal Estate and Gift Tax). This is a tax that the IRS levies on the transfer of wealth from one generation to the next. The IRS levies a tax on the transfer of an estate that exceeds $5.65 million on the date of death (including all assets, non-probate assets, and life insurance). If your estate exceeds $5.65 million on the date of death for 2017, the IRS has a top tax rate of 40%. However, there is an unlimited marital exemption from the federal estate tax. This means that you can leave an unlimited amount of money to a surviving spouse free from the estate tax (so long as the surviving spouse is a United States citizen). Therefore, this leaves the $5.65 million exemption wasted. However, within nine (9) months of the date of death, the surviving spouse can file an estate tax return (even if no estate tax is due) and elect portability. This has the effect of transfering the unused $5.65 million estate tax exemption to the surviving spouse, thereby creating a $11.3 million exemption from the federal estate tax for the surviving spouse.
There is also capital gains taxes that may impact your estate. The capital gains tax is a tax that is levied on the gain earned on an appreciating asset upon its sale. For example, if you buy 100 shares of Microsoft stock in 1990 for $20,000 and you sell the stock in 2020 for $40,000, you will owe capital gains tax on the $20,000 gain. However, when assets transfer to the next generation, the surviving heirs recieve a step up in tax basis. What this means is that the value of the asset that he or she inherited is given the value that the asset is worth on the day that your loved one inherited. For example, let's say instead of selling the Microsoft stock it passed to your child on your death in 2020. The stock would have a tax basis of $40,000 for your surviving child. Therefore, if your child later sold the Microsoft stock for $45,000, he or she would only owe capital gains tax on the $5,000 gain as opposed to the $20,000 gain.
There can also be income taxes that may be due from your final income tax return that would need to be filed, an estate income tax return may need to be filed and taxes owed, and there could be property taxes, or hall tax liabilities that may due depending upon your situation.
If you have concerns about taxes and what you can do now to limit the taxes that your children will have to pay at your death, please contact us at the number below. We are always here to help!
P.S., please contact us with the contact form on the left part of your screen to receive an immediate answer or download my free report on how taxes can impact your estate planning strategy. We look forward to hearing from you!
Daniel A. Perry