Pinnacle Estate Planning

By JASON GRAY

Pinnacle Law PLLC

    When you pass assets down to your children, one of the biggest concerns is how much of that inheritance might be lost to taxes. While inheritance can provide financial security, taxes at both the federal and state levels can reduce the amount your children ultimately receive. Understanding the tax implications and how to structure your estate can help ensure your children keep more of what you leave behind.

Federal Estate Tax

    At the federal level, estate taxes are imposed on the transfer of assets upon death, but only for very large estates. As of 2024, the federal estate tax exemption is $13.61 million per individual (or $27.22 million for married couples). If the total value of your estate is below this threshold, your children will not owe federal estate taxes. However, any amount above the exemption will be taxed at a rate of up to 40%.

State Estate Taxes

    In addition to federal estate taxes, some states impose their own estate or inheritance taxes. These vary by state, and while most states do not have inheritance taxes, some do. State estate taxes can have much lower exemption limits than federal taxes. In states like Washington, for example, estates valued above $2.193 million are subject to estate taxes with rates ranging from 10% to 20%. It’s important to know whether your state imposes estate or inheritance taxes.

    If you live in a state with high estate taxes, consider moving assets to a trust or establishing residency in a state with more favorable tax laws to reduce the burden on your children.

Capital Gains Tax

    When your children inherit assets like stocks, real estate, or other investments, they may face capital gains taxes if they sell those assets. Fortunately, the tax system offers a significant benefit through a “step-up in basis.” This means that the value of the asset for tax purposes is adjusted to its fair market value at the time of your death.

    For example, if you purchased a stock for $10,000 and it was worth $50,000 when you passed away, your children would inherit the stock with a stepped-up basis of $50,000. If they sold it for that amount, they would owe no capital gains tax. However, if the asset appreciates after inheritance and is later sold for more than its stepped-up value, capital gains tax would apply to the profit.

How to Minimize Tax Liability

    Strategies such as irrevocable trusts, lifetime gifting, or charitable donations can lower the taxable value of your estate, allowing more of your assets to pass to your children tax-free.

    While inheritance taxes can be complicated, proper estate planning can help your children avoid or minimize the impact of federal, state, and capital gains taxes. Working with an estate planning attorney is essential to ensure your family’s wealth is preserved for future generations.

*This article is for informational purposes only and should not be construed as legal or financial advice.