Federal Estate Taxation

Estate tax planning California

-The type of assets you have may impact how quickly your family has to pay millions of dollars in estate tax.

Many individuals do not re-assess the size of their assets relative to the estate tax exemption. However, with an estate tax exemption shrinking at the end of 2025 down to $5,000,000, indexed for inflation, many people will find themselves in a position that their estate will be taxed at their death at the rate of 45%, as compared to the current exemption rate of 40% only for assets over $12.9M. This means those in excess of the threshold will pay a higher tax on a greater portion of their estate.

Additionally, those in a taxable range do not appreciate is that if they do nothing, their family will have to pay the entire estate tax bill within 15 months of the date of death. For those with illiquid assets like real estate or closely held business interests, this may be a huge problem. The need to pay the tax bill may likely force a sale at an inopportune time, which may also cause a permanent loss of income to the beneficiaries.

There is some relief for certain closely held businesses, possibly even businesses that happen to hold real estate. But, this extended time to pay the IRS on an estate tax is the exception to the rule and should be closely analyzed with professional advisors.

Many of our firm’s clients have passive income from their assets and these will almost surely not allow for a stretched-out payment to the IRS of the estate tax. What governs this potential allowance to pay the IRS estate tax over time is IRC §6166. This statute allows for payment over time when the closely held business interest is generating greater than 35% of the decedent’s adjusted gross income. Rev. Rul. 2006-34, 2006-26 I.R.B. 1171, contains a list of safe harbors and several examples to assist taxpayers in determining if the decedent’s activities qualify for §6166 treatment. But the test is based on individual facts and circumstances as to whether the money from the business is being actively generated by the decedent versus passive income. If a closely-held entity has both an active business and passive activities, only the value of the active business is treated as the business amount in determining the portion of the tax which may be deferred and which may be use to satisfy the percentage requirements. IRC §6166(b)(9). It is important to note that all passive portions of income, like subsidiary ownership or real property rental income will likely be considered to passive and totally disregarded for the 35% calculation.

Given the narrow exception to IRS’s deadline of all estate tax being due in full within 15 months of the date of death, married couples who expect to have greater than roughly $8,000,000 at death need to be actively planning to reduce estate taxation by consulting with an estate planning attorney and income tax professional advisor. For a single individual, the same recommendation applies to those who have half that amount at death. Keep in mind what type of assets you have, and the rate of inflation, and income generation, which may each contribute to the increase in value of an estate over time. These considerations are in addition to whatever new assets may be accumulated over time with income being earned. Planning early and often with a qualified estate planning attorney, the more options are available and the more dramatic the impacts will be over time.

In California, a great number of families have significant wealth tied up in their personal real estate or brokerage accounts, which continue to increase over time. These individuals will likely have no option to extend payment and those families should update their net worth statement and take their trust to their estate planning attorney for a full review of your estate and estate plan can save your beneficiaries millions of dollars.

Leave a comment

Areas We Serve