The impact of taxes and debts on an estate

On Behalf of | May 28, 2024 | Estate Planning

Individuals who engage in estate planning often have specific wishes they hope to achieve. For example, they may want to leave as much property as possible for a spouse, child or grandchild. Many people dream of their resources having a positive impact on their loved ones after they die, but not every testator’s wishes come true.

Those who fail to plan appropriately can lose a substantial portion of the assets that comprise their estates to outside financial obligations. Both taxes and debts can have negative implications for an Arizona estate. What impact do outstanding financial obligations have on someone’s legacy?

Debts can diminish estate resources

The financial obligations someone has when they die become the obligations of their estate after their passing. It is then the responsibility of the personal representative of the estate to use the assets that belong to the estate to pay the debts of the decedent. They typically need to send official notice about estate administration to known creditors to give them an opportunity to make claims in probate court. Valid creditor claims take precedence over the distribution of assets outlined in the estate plan. In some cases, the personal representative of the estate may need to use every last asset left by the decedent to pay their creditors, retaining nothing for their family members and other beneficiaries.

Taxes can add up quickly

The decedent may have owed income taxes at the time of their death. The personal representative of their estate may need to file a tax return and then pay income taxes on their behalf. There could also potentially be income taxes due from the estate itself if estate administration includes the sale of any estate property. However, it is often estate taxes that have the biggest impact on someone’s legacy. Arizona does not collect an estate tax, but the federal government does. The highest tax rate is 40%, making advance planning important for anyone within the state worth more than $13.61 million in 2024.

Those who understand that both debts and taxes can negatively impact their estates can engage in proper planning to avoid unnecessary losses. Changing ownership of assets and creating trusts are both among the strategies used by those planning to reduce the impact taxes and debts have on their final legacies.