ADVERTISING: ADVERTORIAL - Income tax planning: The overlooked side of estate planning

When most people think of estate planning taxes, they picture the federal estate tax — the tax on transferring wealth at death. But with the federal exemption now at $15 million per individual under the One Big Beautiful Bill Act, and with Idaho imposing no state estate or inheritance tax, most families will never owe a dollar of estate tax.

What they very likely will owe is income tax. For the vast majority of Idaho families, income tax planning has quietly become the more important side of estate planning.

The Step-Up in Basis: Your Biggest Advantage

When you pass away, most assets your heirs inherit receive a "step-up" in basis to their fair market value on the date of death. If you bought a rental property for $100,000 that's worth $500,000 when you die, your children can sell it the next day and owe zero capital gains tax.

Gift that same property to your kids during your lifetime, and your children inherit your original basis — meaning a $400,000 taxable gain when they sell. This is why well-intentioned advice to "just put the kids on the deed" often backfires. For appreciated assets, holding them until death is usually the more tax-efficient choice.

Retirement Accounts Are a Different Beast

Traditional IRAs and 401(k)s don't get a step-up. Every dollar that comes out is taxed as ordinary income to whoever inherits them.

Under the SECURE Act, most non-spouse beneficiaries must empty an inherited retirement account within 10 years. For adult children in their peak earning years, that can mean six-figure distributions stacked on top of existing income — pushing them into the highest tax brackets.

A few strategies worth considering:

• Roth conversions during your lifetime, paying tax at your rate rather than your beneficiary's

• Naming a spouse as primary beneficiary, since spouses have more flexible options than children

• Using pre-tax retirement accounts for charitable bequests — charities pay no income tax, making them ideal beneficiaries for this type of asset if you already plan to give some of your estate to charity

Trust Income Tax Traps

Trusts are powerful planning tools and should be used by many Idahoans, but many people don't realize that trusts hit the top federal income tax bracket (37%) at just around $15,000 of income — compared to roughly $627,000 for individuals.

If your trust holds income-producing assets, distributing that income out to beneficiaries in lower brackets can save substantial tax. Well-drafted trusts give the trustee flexibility to do exactly that.

Practical Steps for Idaho Families

Because Idaho conforms to federal rules on capital gains and has a relatively modest state income tax, income tax strategies work largely the same here as they do federally. A few things to prioritize:

1. Know the tax character of each asset. Pre-tax retirement money, Roth money, appreciated stock, and real estate all behave very differently when inherited.

2. Coordinate beneficiary designations with your overall plan. A retirement account left to the wrong beneficiary can cost the family tens of thousands in unnecessary tax.

3. Review Roth conversion opportunities in lower-income years — especially after retirement but before required minimum distributions begin.

The estate tax may be off the table for your family, but income tax isn't. A well-built estate plan accounts for both.

My law firm is currently offering free telephonic, electronic, or in-person consultations concerning probating estates or creating estate planning documents.

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Robert J. Green is an Elder Law, Trust, Estate, & Guardianship Attorney and the owner of Kootenai Law Group, PLLC in Coeur d’Alene. If you have questions about estate planning, probates, wills, trusts, powers of attorney, guardianships, Medicaid planning, or VA Benefit planning, contact Kootenai Law at 208-765-6555, [email protected], or visit www.KootenaiLaw.com. This has been presented as general information and not as legal advice. Do not engage in legal decision-making without the advice of a competent attorney after discussion of your specific circumstances.