When you plan your estate, you may wonder about taxes that may be applicable. There is a federal estate tax, and it carries a $5.34 million exclusion in 2014. If the value of your estate does not exceed this amount, you do not have to worry about federal estate tax exposure.
On the other hand, if you want to transfer more than $5.34 million, the estate tax looms large. The maximum rate of the federal estate tax is 40 percent.
We practice law in the state of Connecticut. In our state there is a state-level estate tax. At the present time the exclusion is just $2 million. As a result, you could be exempt from the federal estate tax, but exposed to the Connecticut state estate tax.
Inheritance Tax
An estate tax is levied on the entirety of the taxable portion of the estate in question. An inheritance tax is levied on transfers to each nonexempt inheritor.
There is no federal inheritance tax, but there are a few states in the union that have state-level inheritance taxes. Fortunately, there is no state inheritance tax in Connecticut.
Income Tax
You may wonder if your heirs will be forced to pay regular income taxes on inheritances that they receive. The answer is no, there is no income tax liability.
Capital Gains Tax
There is also the matter of capital gains taxation. This tax is potentially applicable when you realize a capital gain.
What is a capital gain? Any time you own property that has appreciated, that appreciation is looked upon as a capital gain. This could be real property, stocks, collectibles, and just about anything that can appreciate.
A capital gain is realized when you actually sell the appreciated assets and assume possession of the gain. You don’t have to pay the tax until and unless you realize a gain.
There are short-term capital gains, and long-term capital gains, and they are taxed at different rates. If you sell the asset within a year of acquiring it, the gain is considered to be a short-term gain. Short-term capital gains are taxed at your regular income tax rate.
If you hold onto the asset for more than a year and then realize a gain, it is a long-term gain. Most people would pay 15 percent. Very low income people could be entirely exempt from capital gains taxation.
Inherited property receives a step-up in basis. When you leave appreciated property to someone, the inheritor is not responsible for the gains. Because of the step-up in basis, the value of the inherited asset for capital gains purposes would be equal to its value when the inheritor acquired it.
If the asset is subsequently sold at a higher value, the capital gains tax would be a factor.
Schedule a Free Estate Planning Consultation
In this post we have provided some basic information about taxes that could be applicable, and we have provided an explanation of the step-up in basis. To learn more, contact us through this link to request a free consultation: Hartford CT Estate Planning Attorneys.
Mr. Horowitz was awarded his Juris Doctor degree with honors from the University of Connecticut School of Law. While attending law school, Mr. Horowitz received the American Jurisprudence Award in Legal Ethics and the Nathan Burkan Award.
After graduation from law school, Mr. Horowitz continued his legal education at New York University School of Law where he received a Post Doctorate Law Degree in Taxation. He has also recently received a national achievement award.
Mr. Horowitz is admitted to practice before all the state courts in the State of Connecticut and the United States District Court.
Mr. Horowitz was selected for Super Lawyers in 2021.
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