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Estate Planning and Tax Issues for Heirs

Taxes are an important part of estate planning. While most people associate estate planning with the desire to minimize federal estate taxes, this will not actually be an issue for most individuals, as the estate tax presently applies only to those estates with more than $5.34 million in assets. But there are other tax issues even smaller estates must consider.

For example, if you plan to leave significant assets to family members, you should consider how it will affect their taxes going forward. A qualified California estate planning attorney can advise not only you, but your potential heirs, on the best way to minimize total tax liability and avoid pitfalls that may prove costly years after your death.

Zampella v. Commissioner of Internal Revenue

A recent decision by a federal appeals court in Philadelphia offers one example of a tax complication arising from the administration of an estate. The deceased, Maria Lee Zampella, lived in New Jersey. Zampella made a last will and testament dividing her entire estate equally among her two sons, Edward and Arthur Zampella, who were also named co-executors. The estate included Zampella’s residence in Monmouth County, New Jersey.

After their mother’s death in 2008, the brothers had the residence appraised at $430,000. Edward Zampella offered to buy out his brother’s one-half interest in the house. To that end, Edward paid $215,000 to a settlement agent who then issued a check to Arthur. The brothers, as co-executors of the estate, then executed a deed transferring 100 percent of the residence to Edward alone.

A tax issue arose when Edward Zampella then claimed an $8,000 credit on his personal income tax return. In 2009, Congress allowed first-time home buyers to claim such a credit. The credit did not apply in cases where a person purchased the home from a related person, including a parent or a parent’s estate. Edward Zampella argued he was eligible for the credit, however, because he actually purchased the home from his brother, who was not considered a “related person” under the tax code.

The Internal Revenue Service denied Zampella’s credit and the Court of Appeals affirmed. Even though his brother did receive a half-interest in the residence under their mother’s will, the documented transaction showed the estate transferring the entire property to Edward. Therefore, he could not claim the tax credit.

This is just one example of how multiple tax issues may factor into estate planning and administration. If you’re looking for advice on how to best address tax questions as part of your own estate planning, contact the Law Office of Scott C. Soady in San Diego today.

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