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Will You Owe Taxes After You Die?

With the annual income tax deadline looming the Benjamin Franklin quoted “nothing is certain except death and taxes,” comes to mind.  Yet, there is uncertainty as to if taxes will be owed and taxes will look like after your death.  There are two common taxes after someone dies, final incomes taxes and estate taxes. Estate taxes are imposed on the value of property and assets that someone leaves behind when they pass away, typically for estates exceeding a certain threshold. When a person dies, their estate which is the sum of everything they own, including money, investments, real estate, and personal belongings, is possibly subject to taxation by the state and federal government before it can be passed on to their heirs or beneficiaries.

For many people there will be a final income tax return filing and possibly individual income taxes owed for the year in which the person died.  Many clients come into estate planning meetings with a goal of avoiding probate because they have heard it is an awful process that costs a lot and takes time.  An issue we run into when all the assets have been beneficiary designated, for the purpose of avoiding probate, is there are no assets left to pay final expenses and final income taxes for the decedent.  One beneficiary is often then paying these expenses out of their inheritance. 

Through the early stages of an estate administration – whether it is a probate administration or trust administration – we gather information about all the assets in the estate and the value of each asset as of the date of death.  Since 2020, the Minnesota estate tax exemption has been set at Three Million Dollars ($3,000,000) per person.  So, any individual with less than $3m, or couple with combined assets under $3m, do not need to worry about estate taxes in Minnesota.  The Federal estate tax exemption is set at $13.61m in 2024. 

With levels like $3m in Minnesota and $13.61m federally many people ask why they should care about estate taxes since they do not have one million dollars let alone three million or thirteen million dollars.  As part of estate planning, we compile a list of all of your assets and their ballpark values, the includes the value of any life insurance policies and other assets you cannot use yet.  Many individuals are surprised to see the cumulative value of their estate because many assets are not liquid or easy to use and so are not thought of when calculating total assets.  Learning about estate planning and tax implications early on can help you and your family protect your assets, minimize taxes and ensure your estate goes where you want it to go.