Estate vs. income taxes: The estate planning focus is shifting

tax papers left on desk in black and white - Melville, NY CPAs

Until recently, estate planning strategies typically focused on minimizing federal gift and estate taxes, such as by giving away assets during life to reduce the taxable estate. Today, however, the focus is shifting toward income taxes.

Since 2001, the federal exemption has grown from $675,000 to $5.43 million, meaning that fewer people have to worry about estate tax liability. In addition, the top estate tax rate has decreased from 55% to 40%, while the top individual income tax rate has increased to 39.6% — nearly as high as the top estate tax rate.

The heightened importance of income taxes means that holding assets until death rather than giving them away during your life may be advantageous. If you give away an appreciated asset, the recipient takes over your tax basis in the asset, triggering capital gains taxes should he or she turn around and sell it.

When an appreciated asset is inherited, on the other hand, the recipient’s basis is “stepped up” to the asset’s fair market value on the date of death, erasing the built-in capital gain. So retaining appreciating assets until death can save significant income taxes.

If you have questions about whether it’s better to focus on reducing estate taxes or income taxes, please give us a call.