Financial obligations can have a negative impact on an estate. Debts owed by the deceased individual can require payments using estate resources. Additionally, the personal representative administering the estate may also need to pay taxes. Many people with millions in assets plan for estate taxes, as they do not want a significant portion of their property to go toward federal taxes.
People sometimes fail to consider the taxes that their beneficiaries or heirs might end up owing. Capital gains taxes can cause significant financial issues for some estate beneficiaries or heirs. How can people planning their estates address their possible risk of incurring capital gains taxes?
Careful planning can limit risky transactions
Capital gains taxes are typically due from those who sell assets that have appreciated substantially in value. Stocks, businesses and real estate are among the various high-value resources that may appreciate substantially in value over time and could theoretically trigger capital gains taxes after their sale.
The amount that the fair market value of the asset increases determines the tax rate that applies. Testators can potentially provide instructions for their beneficiaries, advising them about the risk of capital gains taxes.
They can also use trusts to structure the distribution and sale of assets and limit the possibility of future capital gains taxes. In some cases, taking on co-owners while the current owner is still alive can help reduce the risk of capital gains taxes for beneficiaries after they pass.
The nature of an individual’s property and the likely choices made by their heirs or beneficiaries can influence the most effective means of planning to minimize capital gains taxes. Reviewing probate and estate tax concerns with a legal professional can help testators draft documents that maximize what their beneficiaries inherit.
