For some clients, tax minimization or avoidance makes up a large part of the work related to their estate plan. Usually, those with higher net worths confront these issues. Among them are the gift tax, estate tax, income taxes, and property taxes. Let's briefly touch upon each one.

Gift Tax

Gift Taxes occur as a result of making lifetime transfers of assets to others. As a practical matter, only a small number of individuals face this issue. This is because until 1/1/2026, a person may transfer approximately $11,200,000 in assets without facing gift taxes. In some scenarios transfering assets and paying gift taxes can be more beneficial than having those assets continue to be part of the estate and therefore taxable for estate tax purposes.

Estate Tax

In simple terms, Estate Taxes are paid based on a valuation of the assets you own at the time of your death. If your estate is less than $11,200,000 (as of 2018), then you may not owe any estate taxes (depending on whether you made transfers during your life that utilized the estate tax exemption amount). Many estate plans for married couples take advantage of the "marital deduction" to defer estate taxes until the death of the surviving spouse.

Income Taxes

One area that estate planning lawyers focus on when it comes to income tax is the tax basis for a transferred asset. For example, recipients of assets by lifetime gift generally have the same tax basis as what the gifting party had. On the other hand, recipients of assets through an inheritance after the death of the owner may receive the asset with a "stepped-up" basis. Consequently, if you receive an asset from a living person, you may pay higher capital gains tax than if you had received the asset from someone who has passed away (for example, through that person's will or trust) if you later decide to sell it.

Property Taxes

In California, real property is reassessed for property tax purposes whenever there's a change of ownership. Transfers between parents and children and grandparents and grandchildren may be exempt from reassessment entirely or up to a certain dollar amount.

Because of the property tax system in California, it's possible that someone with highly appreciated property is still paying very little in property taxes. This is especially true if this person has owned the property for a long period of time. Planning how to transfer your real estate intelligently may allow your family to reap significant benefits in the form of maintaining low property taxes.

These are just some of the considerations and potential obstacles that taxes pose in estate planning.

Irrevocable trusts are trusts that cannot be revoked or amended (with a few exceptions depending on the state that you live in). There are different varieties of irrevocable trusts and they may be used for a variety of reasons, including tax savings, protection from creditors, and charitable giving. Usually, irrevocable trusts will be used by individuals or families who either have or expect to have a taxable estate for estate tax purposes.

Gift Tax

A transfer of property to an irrevocable trust with nothing in return is generally treated as a completed gift for gift tax purposes (it may be a whole or partial gift, depending on the circumstances). The transfer may not qualify for the "gift tax annual exclusion" ($15,000 in the year 2018) because usually a future, rather than a present, interest in the trust property is created (i.e., the beneficiaries don't get immediate access to the property). 

Income Tax

The irrevocable trust will generally have its own annual income tax returns depending on the items of income, deductions, gain or losses on sale of assets, and credits that it has. In some cases, special provisions will be included in the irrevocable trust to treat it as a "grantor trust," which cause these items to show up directly on the trust creator's income tax returns. There are strategic decisions that may cause one form to be better than the other.

Estate Tax

In most cases, unless the creator of the irrevocable trust retains some interest or power over the irrevocable trust he or she creates, the assets of the irrevocable trust will not be included in the trust creator's "gross estate" for estate tax purposes. In other words, the assets of the irrevocable trust won't be added into the value of the assets that he or she owns at the time of death.

For those with a particularly high net worth, it is worth considering how irrevocable trust planning can be incorporated into the estate plan, as it may bring considerable tax savings to you and your family.

Without proper estate planning, your eventual incapacity or death can result in a number of expenses and possible taxes that could otherwise be minimized. Here's a rundown of some of the common ones that come up:

Probate

One of the primary reasons that California residents create an estate plan is to avoid the time and expense of probate. Often through a simple vehicle such as a revocable living trust, you can develop a uniform plan that can eliminate the cost, publicity, time, and intrusiveness of a probate proceeding.

Real Property Taxes

California residents enjoy the benefit of "Proposition 58" which is a law that relates to transfers of real property from parent(s) to child(ren). Under this law parents are able to transfer their personal residence and up to $1,000,000 in assessed real property (during life or at death) to their children without having the transferred real estate be reassessed for real property tax purposes. In simple terms, children are able to pay the same low property taxes that their parents paid. Without proper planning, however, parents may be unwittingly giving up this benefit.

Estate Taxes

As of the date of this writing, the estate tax exemption amount (in simple terms, the amount of assets you can transfer to others without incurring estate tax) is just north of $11 million dollars. As a result, few people currently face this issue. However, this exemption amount is scheduled to go back down to approximately $5.5 million on January 1, 2026, which could bring many more people into taxable territory. Certain estate planning techniques can be used to defer the payment of estate taxes.

Income Taxes

Where appropriate, a competent estate planning lawyer will undoubtedly explain possible income tax consequences as well. For example, use of retirement assets to fund charitable gifts or an explanation of the "cost-basis" adjustment of your assets at the time of death, are both important considerations that you should know about. In addition, some types of trust structures may require ongoing income tax filings (and the expenses associated with tax preparation) that you should know about.

Generation Skipping Transfer Tax

A different type of tax exists for special types of transfers that "skip" a generation. For clients with large estates (generally those that will face estate tax) this is often an important topic to visit.

Legal Fees

Although not a "tax" in the traditional sense, it bears noting that when an individual dies without an estate plan, it can often throw families into disarray and cause them to engage a lawyer who then must sift through all of the decedent's information to figure out who gets what and what types of liabilities existed. Proper estate planning can allow families to minimize the legal process after your death since there will be a set of instructions on how exactly your estate is to be managed and/or distributed. Moreover, if you've worked with a lawyer, he or she most likely has a sense for the types of assets that you own and can often be a guide in the post-death administration process.

Many people fear the cost of establishing an estate plan, but when faced with the multitude of possible expenses of not having an estate plan, generally, the question is "can you afford not to have an estate plan?"