26th Oct 2018
If you die without a will (or a trust or other estate planning) like Aretha Franklin, you may lose opportunities to save on taxes.
The estate tax is basically a tax on gifts a person makes in life and at death over a certain amount. That amount is called the unified credit. Some gifts such as those to spouses or charities do not incur estate tax or lessen a person’s unified credit.
Estate taxes usually come up when someone dies and is passing down property to children or other more remote beneficiaries.
Usually when discussing estate taxes, people are referring to the federal estate tax system, with a unified credit and other terms set by Congress. Although, the legislatures of the various states can set up state-level estate tax systems as well.
In recent years, the federal unified credit has dramatically increased in amount, and most people do not have estates large enough to worry about the federal estate tax. However, if you do have taxable estate and fail to plan ahead, it can lead to a large tax bill taking a good chuck out of your estate.
The estate tax is sometimes called death tax or inheritance tax or other names (often depending on the political or economic perspective of the person using the term). The estate tax is not to be confused with gift tax or generation skipping taxes, which are related but different forms of taxes.
In the case of Aretha Franklin, some reports have been made that her estate might have been worth $80 million. If you take $11.2 million off that (the approximate federal unified credit), you are left with $68.8 million of potentially taxable estate. At a rate of 40% (the approximate tax rate after the first $1 million of taxable estate), the number could be around $27 million to be paid to the U.S. Treasury in federal estate tax.
There are more details and complications and arguments in real life, but this simplified example makes the main point: if you have a potentially taxable estate, failing to plan can cost a lot in taxes.
According to this document from the Oklahoma legislature, Oklahoma had an estate tax in some from approximately eight years after statehood (1915) until 2010. Oklahoma’s estate tax system was phased out and abolished by 2006 legislation. Since 2010, estates face no Oklahoma estate tax at the state level – no matter how large the estate.
Few estates face estate tax issues in the current environment. However, capital gain taxes and basis issues are something that many more estates and beneficiaries face.
The general rule in this area is that it is more beneficial tax-wise for heirs to receive property at death than to be given the same property during the giver’s life. This is particularly true of appreciated assets – or assets that are worth much more than when the person making the gift obtained them. This is particularly true of assets that the persons receiving the gift may sell.
Planners should consider the income tax rates between individuals and trusts when doing trust planning and administration.
It is far beyond the scope of this blog post to hit on all the tax issues that can some up in estates and estate planning, but hopefully it is helpful in making this main point: failing to do estate planning can cost you later in taxes.
If our office may be of assistance to you in these areas, do not hesitate to contact us at (580) 338-6503 or at firstname.lastname@example.org or using any of our contact information in the profile. You can also visit www.fieldandhicks.com for more information.
This blog contains general information and the opinions of the author – not legal advice; you should seek the advice of competent counsel (attorney/lawyer) when considering any legal issues.