The Hidden Tax Traps Lurking in Your Estate Plan
As tax season approaches, it's an ideal time to review your estate plan to ensure it doesn't burden your loved ones with unexpected taxes. Many are unaware that estate, capital gains, and income taxes can significantly diminish the assets intended for their heirs.
Here are three common tax pitfalls and strategies to avoid them:
Pitfall #1: Overlooking the Gift Tax Exemption
In 2025, you can gift up to $18,000 per person annually without incurring any gift tax. By distributing your wealth through lifetime gifts, you can reduce the taxable value of your estate. For instance, consider Sarah, who wishes to leave her daughter $500,000. If she waits to transfer this amount through her will, and her estate exceeds the federal exemption limit, her daughter could face substantial estate taxes. However, if Sarah gifts $18,000 each year during her lifetime, she can significantly decrease the taxable portion of her estate, potentially saving thousands in taxes.
Pitfall #2: Neglecting Capital Gains Tax Planning
Heirs inheriting assets that have appreciated significantly may encounter large capital gains taxes upon selling them. Implementing strategies like a step-up in basis can help minimize this burden. Take John, who inherits a house his father purchased decades ago for $100,000. If John sells it for $500,000, he faces capital gains tax on the $400,000 appreciation. However, with proper estate planning, such as utilizing a step-up in basis, the property's value at inheritance could be adjusted to its current market value, potentially reducing or eliminating the taxable gain.
Pitfall #3: Incorrectly Designating Beneficiaries for Retirement Accounts
Designating the wrong beneficiaries for accounts like IRAs or 401(k)s can lead to unforeseen tax consequences. Consider Lisa, who names her estate as the beneficiary of her IRA instead of her children. This decision subjects the IRA to probate, and her heirs lose the advantage of stretching distributions over their lifetimes, leading to accelerated taxation. By directly naming her children as beneficiaries, Lisa could have preserved the tax-deferred growth and allowed for more manageable, extended distributions.
Take Action to Protect Your Legacy
Tax-efficient estate planning isn't exclusive to the wealthy; it's essential for everyone. Begin by scheduling a Peace of Mind Planning Session with us. This $450 consultation is offered at no cost when you mention this blog. Let us help you navigate these complexities and safeguard your family's future.
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This material is for informational purposes only and does not constitute legal advice. No attorney-client relationship is established through this content. The information presented here may not reflect the most current legal developments. Please consult a qualified attorney for advice tailored to your specific situation.
