Individuals planning their estates, adults tasked with probate administration and expectant beneficiaries anticipating an inheritance all have an interest in preserving as much of a testator’s wealth as possible. Estate administration costs and personal debts are among the elements that will reduce the total value of a Colorado estate.
There are potentially also taxes that the personal representative of the estate or its beneficiaries may need to cover. Solid estate plans often address tax liabilities, and those managing estate resources or expecting to inherit property from someone will need to understand how much of the estate may go to settle someone’s tax responsibilities.
What types of taxes may apply to and potentially diminish the value of an estate?
1. Estate taxes
Some people referred to estate taxes as death taxes. They apply to the property in someone’s name when they die. Colorado does not levy a state-level estate tax regardless of how much property someone has to pass to the next generation. Federal estate taxes apply to estates that are larger than $12,920,000 in 2023. In some cases, the estate may have to sacrifice as much as 40% of its total value to federal estate taxes.
2. Income taxes
The executor of an estate will frequently be the party tasked with filing the final income tax return due when someone dies. There could easily be funds due when filing that return. If the estate plan includes instructions to sell estate resources either at an estate sale or by liquidating large assets like real property, the estate itself may be responsible for income taxes. Retaining sufficient funds to cover those taxes will be a crucial consideration during probate.
3. Capital gains taxes
The sale of any valuable property or the transfer of assets to family members who then sell them can trigger capital gains taxes in some cases. People may need to employ special planning tactics to avoid this risk. Different transfer methods can drastically reduce the likelihood that beneficiaries will end up responsible for capital gains taxes.
Deeds, transfer on death paperwork and trusts are all often part of an individual’s strategy for reducing tax obligations for their estate. Understanding the obligations that may diminish the value of a Colorado estate can help testators and others better prepare for probate proceedings.