Many people worry about the potential tax implications their families may face after their passing. Fortunately, for most, the tax burden is not as heavy as anticipated. However, understanding the different types of taxes that may apply can help you plan and ensure your loved ones are financially prepared.

Here’s an overview of the key tax considerations after death:

FEDERAL ESTATE TAX

The federal estate tax applies to the value of an individual’s estate at the time of death. But due to a high exemption amount, most estates are not affected. As of 2024, estates valued at less than $13.61 million are exempt. If your estate falls below this threshold, no federal estate tax will be due.

For those with larger estates, there are strategies to minimize tax exposure. For instance, assets left to a spouse or charities may be exempt. However, this exemption will be reduced to approximately $7 million on January 1, 2026, so plan ahead!

STATE ESTATE & INHERITANCE TAXES

While Colorado does not impose an estate or inheritance tax, some other states do. 

If you own property or have residency in a state with these taxes, it’s worth consulting with a tax professional to determine whether taxes may apply.

CAPITAL GAINS TAX RELIEF

One benefit of the U.S. tax system is the “step-up” in basis that applies to certain assets upon death. For example, if you own stocks or real estate, their tax basis is adjusted to the fair market value at the date of your death.

This adjustment reduces (or eliminates) the capital gains tax liability when the asset is sold by your heirs. However, this process can be more complex for assets held in business entities like partnerships, LLCs or corporations. Understanding these nuances is key to ensuring your heirs benefit.

INCOME TAX ON RETIREMENT ACCOUNTS

If you hold retirement accounts such as a traditional IRA or 401(k), it’s important to understand that these accounts carry income tax obligations. You pay income tax as you withdraw funds during your lifetime, and the same applies to your heirs after your death.

For example, if your IRA is passed to a beneficiary, they will be required to take distributions and pay the corresponding income taxes. Planning for these taxes can help your heirs better manage their tax burden.

PLAN AHEAD

For Colorado residents, the opportunity to ensure your family’s financial well-being starts with education and preparation. 

While the idea of taxes after death can be intimidating, many estates fall below the federal exemption threshold, and Colorado residents do not face additional state estate taxes. However, each family’s situation is unique and tax laws are constantly changing.

Meeting with an experienced estate planning attorney can help you understand the specific taxes that may apply to your situation and explore strategies to reduce or eliminate those taxes. ν

Jennifer Spitz is a shareholder at Lyons Gaddis, specializing in estate planning and tax law.