One of the primary beneficiaries of any estate plan is almost always the IRS. Fortunately, state tax is less of a concern since Florida has no income, estate or death taxes. The actual extent of your tax burden depends a lot on how you plan your estate, however, and a solid estate plan is probably going to require a firm grasp of both Florida estate law and federal income tax law..
The Federal Estate Tax
Strictly speaking, estate tax is not income tax. But if you stand to inherit money from someone, and the value of their estate (and therefore your inheritance) is reduced by estate tax, it can exert the same effect on you as if your original inheritance had been distributed to you as income and you were then taxed on that amount as income.
Fortunately, an estate is not taxed on the first $11.4 million of its taxable value (at current rates), and there are a number of ways to reduce the taxable value of an estate. In other words, unless the estate is very large, it is unlikely that estate tax is going to take a big chunk out of it, if anything at all.
Income Tax Planning Tips
Following are some common ways that prudent estate planning can result in lower taxes:
- The beneficiary of a trust is not liable for income tax on the total trust assets, but only on amounts distributed to him in a given year. Since even a revocable trust becomes irrevocable when the trust grantor dies, distributing your wealth to your beneficiaries after you die, in a gradual fashion under the terms of a trust, can save your beneficiaries in income tax liability. Not only is tax liability spread out over a longer time, but the amount of a yearly distribution is likely to be taxed at a lower rate than a lump sum distribution would be taxed.
- If you transfer ownership of a life insurance policy to an irrevocable trust, or to a revocable trust that becomes irrevocable when you die, then the amounts paid to your beneficiaries after you die are not subject to income tax.
- Placing assets in a trust is also a good way to avoid or defer capital gains tax. As with estate tax, strictly speaking capital gains tax is not income tax; nevertheless, the bottom line is that income is income no matter what the source; tax is tax no matter what the rationale for assessing it; and solid estate planning can reduce the amount that you owe so that you and/or your beneficiaries will have more left over to enjoy.
The foregoing tips represent only a few of the many ways in which proper estate planning can reduce tax liability.
Lorenzo Law Can Help You With Your Tax Planning Needs
Wise tax planning can save you far more than what a lawyer will cost you. If you are formulating an estate plan, or if you are considering revising an existing estate plan, contact trusts and estates lawyer Jose Lorenzo by calling (305) 999-5411, completing our online contact form or visiting one of our offices in Coral Gables and Ft. Lauderdale. We handle cases throughout Florida.