Impact of DC Probate on Federal Taxes

At the death of the decedent, there are typically two federal tax systems that are considered. The first tax system is income tax. From January 1st of the year of death to the date of death, income is reported on the decedent’s final income tax return. After the decedent’s death, income is reported on a fiduciary income tax return.

The second tax system is the federal estate tax.  Congress reinstated the federal estate tax laws and made the reinstatement “permanent.” Therefore, currently, the federal estate tax filing threshold is $5,450,000.00 for the 2016 tax year (indexed for inflation from $5,000,000.00) and the maximum estate tax rate is 40%. A DC probate lawyer can help determine what taxes are applicable to an estate, as well as ways to limit tax exposure.

Minimizing Taxes After a Person’s Death

There are a number of strategies to minimize an estate’s tax exposure. Although there are some post-mortem opportunities available, generally, estate planning prior to death allows for the most options for minimizing exposure to taxes.

One of the primary planning mechanisms—and which often requires planning before a person dies—is the use of disclaimers. Disclaimers are irrevocable, must be in writing and must be completed nine months from the date of death. An asset that has been accepted or used by an individual is often not eligible to be disclaimed. The effect of a disclaimer is to treat the disclaiming individual as predeceasing the decedent.

For example, a common type of planning for a lot of married couples is the preparation of disclaimer to bypass trust wills. The disclaimer to bypass trust will has language that allows for a disclaimer to fund a trust for the surviving spouse’s benefit. Often, the goal of this type of planning is to maximize the full use of the first deceased spouse’s estate tax exemption. If the bypass trust is only funded to the District of Columbia estate tax exemption in the year of the decedent’s death and below the federal exemption for the year of death, there may be no federal and District of Columbia estate taxes due at the death of the first spouse. At the death of the second spouse, the assets of the disclaimer to bypass trust would not be included in the second spouse’s estate.

It may be important to speak with an experienced DC attorney to determine if your estate surpasses either the District of Columbia or federal estate tax filing threshold, and discuss strategies for estate planning that may result in limited exposure to estate taxes.

Advantages of Hiring a Probate Lawyer

It is important usually for the personal representative or the trustee to hire a probate attorney so that the attorney can help determine what estate tax or other tax may be due—whether they are state taxes or inheritance taxes. An attorney can help to value all of the assets as of the date of death to determine whether they exceed the filing threshold for either or both the District of Columbia estate tax and the federal estate tax.

An attorney who works in probate can assist with valuing the assets of an estate to determine whether they surpass the federal estate tax filing threshold. Currently, for the 2016 tax year, the federal estate tax filing threshold is $5,450,000 which has been indexed for inflation from $5,000,000. An attorney may be able to assist with the preparation of any estate tax returns due, if the estate exceeds that filing threshold. In doing so, an attorney can assist with valuing all the assets as of the date of death pursuant to the federal rules of valuation and determining if there are any post-mortem decisions that can be made that may alleviate or minimize the estate’s tax exposure.