Death and Estate Tax

Utah Residents Can Avoid Estate Tax with Planning

Estate Tax, sometimes called “death tax” or “inheritance tax” is a common topic of
discussion with our clients. Under the current regimen, most Utah Residents will not owe
estate taxes but they may inadvertently cause taxation their descendants would otherwise
not have to pay.

What is the Estate Tax?

The Estate Tax is a Federal Tax on large estates. As of 2019 the Federal estate exemption
amount is $11.4 million per person. This means that each individual can leave behind $11.4
million to their descendants completely tax free. Note this only applies to descendants; the
Unlimited Martial Deduction allows for the unlimited transfer of assets tax free between
spouses in life and in death. For those estates that do incur taxes, the rate can be steep, up
to 40% of the estate remaining after exemptions and deductions. A person’s estate is defined
broadly for taxation purposes. Real estate, liquid assets, retirement plans and even life
insurance can be included in an estate.
The Federal Estate Deduction is in constant flux. For example, in 1998 the exemption was
only $625,000 per person with a max taxation of 55%. The exemption amount in 2008 was
$2 million. The rate jumped in 2010 to $5 million where increased incrementally until 2017
when it jumped to over $11 million. The current tax exemptions are set to expire in 2025
and unless Congress intervenes will revert back to $5 million. For this reason, even if estate
tax is not a current concern, the volatility in the exemption amount means that even middle
class Utah Residents should prepare to avoid taxes in their estate plans.
While other states impose their own Inheritance Tax, Utah taxes its residences only when
Federal Tax is due. For all intents and purposes, this functions as if Utah does not have its
own tax.
Legal options exist to minimize the impact of estate taxes for large estates. Careful planning
can greatly alleviate the burden left on future generations.

Adding Children to the Deed Can Cause Extra Capital
Gains Taxes

A generally bad strategy involves adding a child or children to the deed of your home. People
sometimes think that they will make things easier if they transfer ownership of their assets to
their children before they die or enter a nursing home. The problem with this strategy is that it
will often result in extra capital gains taxes. For most people, transferring property to a trust can
often achieve the desired result without incurring the extra taxes.
Property owned by Utah Residents gets a stepped-up basis at the time of the owner’s death. This
means that their heirs receive the property with an ownership interest equal to the asset’s value at
the deceased person’s date of death. For example, if a person buys a home for $100,000 and
when they die the home is valued at $300,000, their heirs will not owe taxes on the home up to
$300,000. However, if that same person had transferred the home to his son prior to his death,

the property would not get the stepped-basis and the son would owe taxes on any amount over
the original purchase price of $100,000. The takeaway here is that transferring property can have
unintended consequences and should be discussed with legal and financial professionals.

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