Legacy Course Review: Article #8
Death & Taxes
Source: Apartment News Magazine
By Timothy Gorman
Real Estate Broker/CPA/Entrepreneur
This week’s topic deals in our ten-week Estate and Legacy Planning class is one of life’s certainties, much like death taxes come for us all. This series is designed to be engaging and practical, providing comprehensive insights while equipping participants with a solid framework for their estate plans and actionable steps for themselves and their advisors.
In this article, we’ll focus on Week 7: Taxes. We covered various aspects of taxation, including income, estate, and other forms, alongside upcoming tax legislation updates, proactive year-end tax planning for 2024, and strategies for minimizing estate taxes. Our goal is to explore creative, legal ways to “disinherit the government” while maximizing the legacy you leave behind.
We all know the outcome of the 2024 election, and as the saying goes, “elections have consequences.” We are still in the early days of a new administration, and the reality is that we won’t likely understand the impact of any new tax legislation for some time. Our focus remains on the current rules and the known implications of the impending sunsetting of the Tax Cuts and Jobs Act (TCJA), a landmark legislation signed into law on January 1, 2018. The TCJA marked the most significant overhaul of the tax code in three decades, establishing a flat corporate tax rate of 21%. However, many individual tax benefits are set to expire in 2025.
Even before the TCJA, careful estate planning techniques were successfully used to secure and transfer wealth across generations. Regardless of any changes on the horizon, these strategies can be navigated effectively with proper preparation and by hiring the right professionals.
As we discussed, there are always key issues that could threaten wealth transfer, such as changes to the 1031 Tax-Deferred Exchange, Proposition 13, and Step-Up in Basis. However, for the purposes of this article, we’ll maintain a positive outlook and focus on what we know now, along with legal strategies to lower our taxes.
Joining us for this session was Yuval Domb, CPA, who helped clarify some of the more technical aspects of the tax code. Understanding the different types of taxes and how they interact with one another and your long-term strategy is crucial.
During our session, guest speaker Yuval Domb, CPA, clarified the technical aspects of the tax code. We discussed several key tax categories:
- Income Taxes: Federal income tax rates range from 0% to 37%, while California has a top rate of 13.3% for high-income earners.
- Property Taxes: Proposition 13 caps property tax at 1% of assessed value, with annual increases limited to 2% unless reassessed. Proposition 19 limits the parent-to-child property tax exclusion to primary residences.
- Estate Taxes: The federal exemption is $13.61 million per individual for 2024. California has no state estate tax, but federal estate taxes apply if the estate exceeds the exemption limit.
- Capital Gains Taxes: Long-term capital gains are taxed federally at 0%, 15%, or 20% depending on income, with California taxing all capital gains as ordinary income.
- Final Taxes: After passing, executors must file several tax returns, including the Final Individual Income Tax Return (Form 1040), Estate Income Tax Return (Form 1041), and Federal Estate Tax Return (Form 706) if applicable.
We explored strategies for minimizing estate taxes, including:
- Lifetime Gifting: Reduces income and gift taxes while removing assets from your estate, potentially avoiding estate taxes.
- Irrevocable Trusts: Provides income tax advantages by removing income-generating assets from your estate.
- Charitable Giving: Yields immediate income tax deductions and reduces the size of your taxable estate.
- Life Insurance Strategies: Provides income tax-free proceeds for estate taxes upon death.
- Marital Deduction: Allows unlimited tax-free transfers to a spouse during your lifetime and at death.
- Family Limited Partnerships (FLPs): Transfers assets at discounted valuations while maintaining control.
- LLCs and Corporate Entities: Provides asset protection and may reduce income taxes.
- Property Tax Protection (Prop 19): Limits reassessment on primary residences between parents and children.
We also discussed how personal income taxes can impact estate planning decisions. Income generated by estate assets, such as interest and dividends, may incur tax liabilities. Structuring your estate strategically can reduce these liabilities for you and your heirs.
Additionally, charitable contributions made through your estate can provide significant tax benefits, such as deductions for donated appreciated assets. Establishing mechanisms like a Charitable Remainder Trust (CRT) can also yield income tax and estate tax advantages.
To conclude, we examined tax obligations that arise after passing. Executors must file a final income tax return (Form 1040) covering the period from January 1 until the date of death. The federal estate tax applies to the transfer of the deceased’s estate before distribution to beneficiaries if the estate exceeds the exemption threshold. Executors must file Form 706 for estates subject to federal estate tax within nine months of death.
In our next article, we’ll focus on the often-overlooked emotional aspects of planning. In my experience, legal and financial aspects can be straightforward, but navigating the emotional side of losing a loved one can be far more complex.