Estate planning and taxes: The questions advisors hear most

Why estate planning and taxes go together

When CJ answered a call from a Manhattan financial advisory firm after the passing of his client, he wasn’t expecting the tone of the call to be so tense. The trust had been structured so that the client’s IRAs were to flow through his trust rather than directly to his son. The advisors on the other end of the phone wanted to know why. They were convinced that this was a mistake on CJ’s part and would have consequences for tax implications. 

CJ waited for the temperature to cool before responding. He knew his client and his family. Specifically, this client’s only son. CJ and his client had established the trust to help this son, who had been battling addictions for years. They knew that handing him a direct inheritance would accelerate problems that his father had tried to protect his son from. 

By the end of that call, the Manhattan advisory firm was on the same page. The son would take a little longer. 

This son was not in good shape when he arrived. His need for his inheritance drove him to CJ’s office. Regardless of his reaction, CJ knew he couldn’t do anything about it. The trust had conditions about sobriety, and they needed to be met before anything could happen. The son stormed out. 

Two years passed without a word. 

The son returned as a new man. Shaking CJ’s hand, this man handed CJ his sobriety certification. It was now time to receive a saved inheritance. He thanked CJ for how he had handled the situation. Sobriety was the greatest gift his father could have left him. 

CJ shared how this man is still sober ten years later. The funds are still with the same Manhattan advisory firm. The legacy continues growing. 

Estate planning is only as good as the details behind it. There are several factors that may affect the outcome. One area of careful consideration is taxes and tax planning for estates. Most of the questions CJ answers on the webinar are about thresholds, tax rates, and how IRAs and trusts interact.

What estate taxes apply after the grantor dies

When someone dies, their estate is subject to two layers of taxation. The federal estate tax and any applicable state estate tax. 

Most clients come in with the same fear: that taxes will take a significant portion of what they have earned across a lifetime. CJ explains this more in the webinar. But it comes down to the fact that tax thresholds aren’t fixed. Taxes have moved before, and Washington, D.C., often discusses changes. CJ encourages advisors to keep this conversation open with their clients.

Is a revocable trust taxed at the trust rate

A revocable trust is not a separate taxable entity while the grantor is alive. It does not file its own return or need a tax ID number. The grantor files under their own Social Security number at their own rate, the same way they always have. 

Advisors have come to him in private practice to tell him that they don’t recommend trusts to clients because of high tax rates. This is a misunderstanding. He is honest and direct. This misunderstanding is steering clients away from a tool that could serve them well. 

The trust rate, which can range from 38 to 41 percent, applies only after the grantor dies and the trust becomes irrevocable. CJ has seen this transition create confusion for loved ones and their advisors. Good planning before that transition from revocable to irrevocable makes a significant difference, and CJ walks through what that looks like in the webinar.

Can a trust be the beneficiary of an IRA or 401(k)

It depends. For that reason, it’s highly recommended to meet with an estate planning attorney to make the decision if naming a trust as a beneficiary of an IRA or 401(k) is the right move for clients. 

CJ talks about how important it is to consider details and context. There may be families and circumstances where routing through a trust is the right thing to do. But that takes careful planning and intentionality from the client, financial advisor, CPA, and estate planning attorney. 

The webinar includes strategies to consider, like, see-through trusts, how it applies, why tax planning is needed, and how the SECURE Act changed the conversation.

Do heirs pay taxes when they sell an inherited home

It depends on when the home is sold and what it is worth at that time. Heirs receive a stepped-up basis based on the value of the home at date of death. If the home sells at that value, there is typically no taxable gain. If the value has increased between the date of death and the sale date, heirs pay capital gains tax on the difference. 

CJ warns financial advisors here. He explains that one way clients get into trouble is using deathbed deeds. A deathbed deed, in this case, transfers the property to the heirs without probate immediately. The goal is to save money. But if the home has grown in value over the years, which most have, the heir pays capital gains tax on all of that growth when they sell. It removes the stepped-up basis that typically resets that number and usually eliminates a large tax bill.

What’s inside the webinar

The details and circumstances matter. This webinar is intended for educational purposes; and yet, CJ circles back often to the importance of understanding the details and talking to the right people before making decisions. Advisors can start conversations. CPAs and estate planning attorneys provide additional direction once the details of a client’s situation are understood. 

Watch the webinar to hear our CLO and licensed attorney address these topics with his expertise.

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