You might think that when you die, you can finally stop worrying about taxes. Sadly, life doesn’t work that way. Even after your death, the government will still try to lay claim to your property, possibly at the expense of the legacy you want to leave for the people you love.
If you don’t plan ahead, there could be tax issues that prolong probate proceedings and diminish the inheritance that your loved ones receive. Thinking about the tax implications of your estate plan is of utmost importance when you create or update your documents, especially if you have a significant amount of property or particularly valuable assets to pass to your loved ones.
What tax concerns do you need to address?
The good news for those living in Virginia is that the state does not levy an inheritance tax or an estate tax, but the federal government does. If your estate exceeds the federal estate tax threshold, which is more than $12 million in 2022, your executor will have to pay estate taxes before distributing any assets to your loved ones.
Personal and estate income taxes
Your executor will probably file a last tax return on your behalf after your death. If you instruct them to sell your property so that your loved ones can split the money instead of taking physical assets, the estate may have income tax obligations.
If estate sales generate more than $600 in revenue, your executor will likely need to file an estate income tax return as well. You may want to earmark money in your estate plan to cover your own income tax obligations and the estimated income taxes for the estate as well.
Taxes on large transfers
Some people would prefer to keep their biggest assets out of probate court, but using the wrong method could trigger tax obligations. Specifically, the use of a transfer on death deed to bypass probate court for a home might mean that your loved one has to pay taxes on the value of the home, which could be a significant burden.
Understanding the tax obligations can help you create an estate plan that minimizes how much of your legacy goes to taxes.