Taxes are one of several financial obligations that people need to consider during estate planning. Frequently, people focus primarily on estate taxes. Federal estate taxes can consume as much as 40% of an estate’s value, thereby substantially diminishing what beneficiaries or heirs inherit.
There may also be income taxes and capital gains taxes to consider. Typically, the personal representative administering an estate covers direct tax responsibilities, but some tax obligations pass to beneficiaries or heirs. Careful planning can help testators limit what taxes their loved ones must pay. There are certain ways for those establishing an estate plan and preparing for the descent of real property to strategically address real estate taxes and limit the burden imposed on their beneficiaries.
Proper planning can limit tax exposure
The most important consideration for property tax liability is typically the assessed value of a property. The state reviews and updates the assessed value after ownership transfers. When an individual sells their home to someone else, the new buyer has to pay taxes based on the current assessed value of the property.
People who have owned their properties for years can limit their real estate tax exposure. It is possible to prevent the state from reassessing the property and drastically increasing property tax obligations. Taking on a co-owner before passing is one strategy to avoid increased property taxes. Owners who hold the property as joint tenants can transfer their interest to the surviving tenant without any tax complications.
Homeowners can also arrange to transfer their interest in a property to a spouse or their child without real estate tax complications. In some cases, it may also be possible to prevent future tax challenges by transferring real property to a trust well in advance of future ownership transitions.
Each of these strategies offers benefits and drawbacks. Factors ranging from current family relationships and property values to retirement plans can influence the best strategy for property owners to employ. Reviewing personal holdings and legacy goals with an estate planning attorney can help those who own real property plan to minimize real estate tax liability. With the right plan, people who own their own homes can better ensure that their loved ones inherit valuable property, not an oppressive tax obligation.