Income Tax – the “Other” Tax in Estate Planning

Many people are aware of the increased federal estate tax exemptions (approximately $11.2 million plus a COLA adjustment for a decedent dying in 2018 through December 31, 2025 and then reverting to $5.0 plus COLA) along with the elimination of New Jersey estate tax (but not its Inheritance tax which remains in effect).  They, therefore, think that estate taxes are no longer a concern, and accordingly, no tax planning is needed when creating their wills and related estate plan documents.

Overlooked, however, is the importance of income tax planning as part of planning an estate, and in particular, the income tax basis of assets gifted or inherited.

Under the Internal Revenue Code, assets gifted during lifetime retain the income tax basis of the donor, but not in excess of their fair market value at the date of gift.  However, assets inherited upon the death of the owner receive a new tax basis equal to their fair market value at the date of death.  (This is commonly referred to as the “step up” in basis rules).  For example, an asset that cost $100, but has a fair market value of $1,000, would have a tax basis to the done of $100 if received by gift and a tax basis of $1,000 if received by inheritance.

From these income tax rules, there are several significant planning tips.

If you have any questions regarding these items, or in general, regarding your estate plan, please contact one of us in the Estate Planning & Administration Group.