Taxation

Tax issues arise in most areas of our work. Income tax and estate taxes can become a question in Decedent’s Estates and Trust Administration including Trust Distributions, Special Needs Trusts, and Conservatorships. Property taxes can be implicated in any of these types of cases which own real property, especially when there is a transfer of the property.

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Income tax and estate tax issues often arise in a decedent’s estate. Income tax issues arise often from the sale or distribution of estate assets. A knowledge of income tax rules (especially the step-up in cost basis of a decedent’s property) that minimize the income taxes due on a sale after death, and a knowledge of estate tax rules and whether or not the estate value is large enough to require the filing and payment of estate taxes is necessary is beneficial.

In a probate estate, the court requires that all known obligations of the estate be paid before distribution to beneficiaries, so knowledge of the income tax and estate tax is an important piece of being able to make the final distribution of the estate to its beneficiaries.

In a spousal estate plan, there is more income tax planning that may be beneficial in choosing which assets to place in the first spouse to die’s trust share and the second spouse’s to die’s trust share, often called the Survivor’s Trust and the Exemption or Bypass Trust. This also has to do with the “step-up” in cost basis available at the first spouse’s death followed by possibly a second “step-up” in cost basis on the second spouse’s death.

What assets the trustee may allocate to each of these trusts takes into consideration various things including the surviving spouse’s ongoing needs, income tax planning including looking at possible appreciation and depreciation of the assets after the first spouse dies and future estate taxes.

It is important to take into consideration income tax issues including the step-up in cost basis and possible future estate taxes when a surviving spouse dies. Some estate plans for spouses give everything to the second spouse to die so there will be a 100% cost basis step-up in property at that spouse’s death and allocation planning like this may not be necessary. This allocation issue also looks at estate tax planning so that the property subject to a possible estate tax when the survivor dies is taken into consideration.

While allocation is not necessary for a non-spousal death, income taxes and estate taxes are still questions which should be reviewed.

Depending upon whose money was put into the Special Needs Trust, the income tax filings and payment of the income tax may differ. If the funds come from the special needs trust beneficiary, it is possible that the special needs trust beneficiary can treat the income as their own and simply file their own income tax return on the trust income.

In other situations, it is the trust that needs to pay the income tax unless distributions of income are made to or on behalf of a beneficiary and then the beneficiary will be taxed when the income is distributed to them.  

If funds are given as an inheritance and then put into a special needs trust, we will make sure that the income tax benefit of “cost basis step-up” at decedent’s death is available for future sale of those investments. This “cost basis step-up” to date of death could result in a possible income tax savings when the inherited property is later sold.

Normally, if you sell something like stock, the taxable gain (if any) is calculated on the sales price reduced by what you paid for it. However, when someone dies, if the stock has increased in value, it will get a step-up in cost basis to the date of death value, so that when that stock is sold later, the taxable gain is calculated on the sales price reduced by the date of death value (stepped-up cost basis). 

Income tax issues arise in conservatorships similarly as they do for the individual who is in need of a conservatorship.

In a conservatorship, however, often the conservator may need to sell property of the conservatee and there may be the need for income tax planning related to this sale. This is especially true when a principal residence of the conservatee is sold to help pay for care as there are certain income tax benefits on sale of a principal residence.

Income tax planning is also important because if assets need to be sold, we may want an estimate of the income taxes that will be required on any sale in order to know how much will be available to our client after the sale.

An estate that is valued at over the estate exemption amount will be subject to an estate tax. In 2024 the estate exemption amount is $13.61 million.

However, beginning in 2026, the estate exemption amount will go down to around $6 million. With no change in the law, many estates could again be subject to an estate tax.

With no change, if you are married, many of our clients may wish to include “bypass” or “exemption” trusts so that two spouse’s exemptions are available i.e., $6 million x 2.

We are able to provide estate tax planning if your estate may be subject to an estate tax. We are familiar and assist with various planning methods including gifting, life insurance trusts, and residence trusts if your estate may be subject to estate taxes.

Because of changes in California’s property tax reassessment exclusions, it is very important that knowledge of this area is also a part of overall consideration in every area mentioned above when real property is owned.

There are certain rules in place to still be able to pass your “principal residence” to one of your children at death. However, it is very important that your child/children seek advice soon after death for this exclusion to be available. An important thing to be aware of is that the home-owner’s exemption should be placed on your principal residence before you die. No later than one year after death, your child must also file a home-owner’s exemption form for that property. This allows a child living in the property to be eligible for an exclusion from reassessment based on the transfer of the property to that child.

In addition, transfers of interests in property most often result in property tax reassessment. However, there are certain ways of holding title that may not trigger property tax reassessment which can be considered.

Two of us at the firm have a Masters of Laws in Taxation in addition to our law degree.  Others in the firm have experience in this area from many years of working in this area.  We often work together as the situation requires.

This base of knowledge complements all of our areas of work and gives us the ability to provide comprehensive services to our clients.

Getting Started

Call our office at (415) 974-5715 or email info@kfslaw.net to get started.

Our experienced attorneys who work on taxation: