Parents often hope that their estates provide financial support for their children after they die. It is common practice for parents to name their children as the primary beneficiaries of their estates. However, particularly if testators have relatively valuable personal holdings, taxes are an issue they may need to address as they plan their legacies.
Taxes can diminish the overall value of an estate and can create significant burdens for an individual’s heirs or chosen beneficiaries. Those preparing for a transfer of wealth to the next generation with a Florida estate plan may need to consider the tax implications of their decisions.
What taxes might apply?
Florida does not assess an estate tax, so only those with relatively large estates have to worry about federal estate taxes. In 2024, the exemption threshold for federal taxation is $13.61 million. If a Florida estate is worth less than that, there is no tax based on the overall value of the estate. Beneficiaries typically do not need to worry about inheritance taxes either.
However, if the children inheriting from an estate are likely to sell off or liquidate estate assets, they may be at risk of capital gains taxes. For example, if they sell the home that they inherit from the estate, capital gains taxes may apply to any appreciation in property value that occurs after their parent’s death. Capital gains taxes are often fairly minimal if children sell assets soon after a parent dies.
Common mistakes
Capital gains taxes can greatly increase if a parent adds their children as co-owners of a property prior to the parent’s death. This is because assets that are inherited upon a parent’s death are subject to a “step-up in basis”, meaning that for tax purposes, a child only pays capital gains on the increase of the property value between of the parent’s death and the date the child sells the property. But for property gifted to the child before the parent’s death, the child pays capital gains on the increase of the property value between the date the child became a co-owner and the date the child sells the property. If a child is added as a co-owner years before the property is sold, then the capital gains tax will be much higher.
Parents hoping to maximize how much their children inherit and minimize how much they have to pay in taxes need to consider not just what assets they intend to leave to their children but also what their children are likely to do with those assets. Having a detailed conversation with beneficiaries either individually or as a group can help testators choose the best way to structure the inheritance.
Trusts, annual gifts prior to death and transfer-on-death designations attached to financial resources are all ways of minimizing the value of an estate for the purposes of estate taxes. Appropriate planning can also potentially diminish the likelihood of capital gains taxes and even income taxes owed by the estate itself due to the sale of estate assets.
Reviewing potential sources of tax liability can be an important aspect of modern estate planning for parents. Parents who implement the right strategies can significantly reduce the tax burden that will fall on their children when they inherit from an estate.