There is an aphorism that the only certain things in life are death and taxes. Probate court is where those two certainties of life sometimes collide. Those with substantial personal holdings may leave behind large estates when they die unless they plan carefully ahead of time.
Certain tax obligations are inevitable. For example, both the estate and the decedent may be responsible for income taxes. The personal representative of the estate must file tax returns and set aside resources to handle any outstanding income tax obligations after someone’s passing. If the probate process involves the sale or liquidation of assets, there could be capital gains taxes to cover.
In some cases, an estate itself may be subject to estate taxes. The federal tax rate that applies to estate resources is progressive. What does that mean for testators with sizable personal resources that may need to pass through probate court?
The higher the estate’s value, the higher the taxes
A progressive tax rate increases based on the value of the estate itself. There is a threshold after which estate taxes apply. Estates worth less than that amount are exempt from estate taxes. The Connecticut state estate tax is a flat tax of 12%, but the federal estate tax is progressive.
As of 2024, the federal estate tax exemption is $13.61 million. Estates worth more than that are subject to estate taxes, and the lowest tax rate that might apply is 18%. The tax rate increases the more that the estate exceeds the current exemption threshold. Estates worth $1 million or more than the threshold are subject to the maximum estate tax rate of 40%.
Advance planning is the only reliable means of mitigating estate tax liabilities. Changing the ownership of assets, arranging for strategic gifts and funding trusts with personal property are always to reduce what an estate is worth and therefore whether estate taxes apply or not. Even if advanced planning does not eliminate the risk of estate taxes, it could still help a testator avoid the highest tax rate possible given the overall value of their resources.
Becoming more familiar with the taxes that could affect a complex estate after someone’s passing may benefit those engaged in estate planning who want to maximize what loved ones receive from their resources after their death. At the end of the day, factoring taxes into estate planning is important for those who have sizable personal holdings.