Do I Need a Will or Living Trust in Florida: Taxes (Part 2 of 3)
Do I Need a Will or Living Trust?
Welcome back. This week to the second installment of Wills vs. Living Trusts.
To recap, this is the second entry of a three-part series examining which is better, a Will or a Living Trust.
On what criteria, you ask. Well, each article in this series reviews one of the three common reasons for estate planning. The reasons are: (1) avoiding probate, (2) lowering estate taxes, and (3) avoiding conflict between beneficiaries.
The first article, which focuses on avoiding probate, is available here.
Before starting a discussion on the second reason, taxes, just a quick disclaimer. Trusts & estates laws are state-specific, meaning each state has its own rules, this article’s answers will be based on Florida law.
Taxes & Estate Planning
Taxes! Regardless of how you feel about them, they are likely going to be your biggest expense during your lifetime. That’s why you have every right to legally reduce your tax burden.
Estate Taxes & Inheritance Taxes
There are two main taxes associated with dying: Estate Taxes and Inheritance taxes.
Estate Taxes
Estate taxes are taxes on the transfer of assets from someone that has died paid by the estate of the deceased person.
Currently, the federal government of the United States plus the governments of twelve estates and the District of Columbia levy an estate tax on their residents and assets within their jurisdiction.
If you are a U.S. citizen, a resident of the United States, or own assets in the United States, you may owe estate taxes.
Inheritance Taxes
Inheritance taxes are taxes on the transfer of assets from a deceased person paid by the beneficiary, or the person receiving the dead person’s assets. Currently, six estates levy an estate tax.
Estate Taxes & Inheritance Taxes in Florida
Will I Owe Estate or Inheritance Taxes to Florida?
Florida does not levy an estate or inheritance tax, so if you are a resident of Florida, you will not owe estate taxes or inheritance taxes to the State of Florida, you may owe estate taxes or inheritance taxes if you own assets in a jurisdiction that does, however.
Will I Owe Estate or Inheritance Taxes to the Federal Goverment?
Since Florida is a state within the United States, if you are a resident of Florida, you may owe estate taxes. U.S. Citizens are subject to estate taxes but are given a threshold before the tax is levied. This threshold is called the Basic Exclusion Amount. The Basic Exclusion Amount varies, it’s politically sensitive and adjusts for inflation. In 2025, the Basic Exclusion Amount is $13.99 million. If your estate is worth less than that & you pass away during 2025, you do not have to worry about federal estate taxes.
Wills vs. Living Trusts on Estate Taxes
Ownership & Control: Important Concepts
The amount of estate taxes is based on the value of the assets in the decedent’s ownership or control on the date of death. So, for estate tax purposes, something will be included in your estate if you own it or have control over it. Keep this in mind, because it’ll be important later.
Wills & Estate Taxes
Ultimately, a Will has no effect on your estate taxes. That’s because in a Will, you can only bequeath the assets you own. Assets you own are included in the value of your estate, so if you’re giving it away in your will, it’s included in your estate.
Living Trusts & Estate Taxes
Believe it or not, just like a Will, a Living Trust also has no effect on your estate taxes. You may be wondering “how can that be? If I transfer assets out of my name and into the name of my trust, I don’t own it anymore.” Well, in a sense that’s true. On paper, you do not. But, remember that estate taxes are based on the value of assets in your ownership or control.
In a Living Trust, you keep control of the assets in the Living Trust for your lifetime. So while a Living Trust can help you avoid the costs of probate, or keep assets out of the hands of your beneficiaries’ creditors, a Living Trust cannot help you reduce estate taxes.
Other kinds of Trusts, where you give up ownership of the assets (called an Irrevocable Trust) as well as control can reduce the value of your estate taxes. Examples of these types of trusts are Irrevocable Life Insurance Trusts and Chartiable Remainder Trusts.
Wills vs. Living Trusts on Capital Gains Taxes
Despite the name, Estate taxes are not the only taxes related to death that you can use an estate plan to navigate. No matter your networth, you can also reduce capital gains taxes for your beneficiaries through estate planning.
What Are Capital Gains Taxes?
Capital gains taxes are the name given to taxes due to the sale of an investment. Examples of assets that incur capital gains tax treatment are stocks and real estate.
How Do Capital Gains Taxes Work?
The simplified basic equation for how capital gains tax works is:
Sale Price - Basis = Capital Gain or Loss
Sale Price is the price when you sell the investment for
Basis is the price you paid for the investment when you bought it
Capital Gain or Loss is difference between Sale Price minus Basis.
If the result is a positive number, you have a Capital Gain.
If the result is a negative number, you have a Capital Loss.
The important concept for estate planning is Basis, or the price you paid for the asset.
Why Basis Is Important
Let’s say you bought a house for $70,000.00 in 1980. Today that house is worth $1M.
If you were going to sell the house, you would owe capital gains taxes on the $1M difference.
Here's example to make it tangible:
You Selling the House
Sale Price - Basis = Capital Gain or Loss
$1,070,000 – $70,000 = $1,000,000
Because you held the house for longer than a year, you would be subject to long-term Capital Gains Taxes.
Not on the Sales Price, but on the Capital Gain of $1,000,000.
At the current Capital Gains Tax rate of 20%, the capital gain taxes owed if you sold the property would be around $200,000.00.
The "Step Up" in Basis
When you die, the heir(s) who inherit your capital assets receive what is called a “step up” in basis. This is an adjustment to basis that changes the amount of basis to the fair market value of the investment on the date of death.
Another example to make it tangible:
Your Heirs Inherit and Sell the House
Sale Price - Basis = Capital Gain or Loss
$1,070,000 – $1,070,000 = $0
Because your heir(s) inherited the house, their basis was adjusted to the fair market value on the date of your death. If this heir(s) sells the house before it changes in value, they would not owe any capital gains tax. That’s a tax-free million.
You may be wondering: if this happens just by inheriting, how does an estate plan help?
Great question. It helps because you can align saving in taxes with your other goals like avoiding probate.
Be Wary of Joint Tenancy with Right of Survivorship
A common way people try to avoid probate is through joint ownership, like joint tenants with right of survivorship. They simply add their kids’ name to the deed as a joint tenant.
Joint Tenancy with Right of Survivorship can avoid probate, but it will cost them in potential tax savings.
The “step up” in basis is not available for gifts or transfers made during your life. For lifetime gifts, the basis carries over, meaning the recipient of the gift receives your basis, which is the price you paid for it back when you bought it.
Because a Joint Tenancy with Right of Survivorship requires that the percentage of ownership be equal between all owners, you can’t give a small percentage to get around this rule. Every owner needs an equal percentage of ownership in the property.
Using the same example as before:
You Selling the House
Sale Price - Basis = Capital Gain or Loss
$1,070,000 – $70,000 = $1,000,000
Capital Gains Tax: ~$200,000
Your Heirs Inherit and Sell the House
Sale Price - Basis = Capital Gain or Loss
$1,070,000 – $1,070,000 = $0
Capital Gains Tax: ~0
Before you die, you add your child to the house as a joint tenant with right of survivorship. They receive the full title to the house when you pass away.
An example to illustrate:
Your Joint Tenant Heirs Inherit and Sell the House
Sale Price - Basis = Capital Gain or Loss
$1,070,000 – $1,035,000 = $35,000
Basis is $1,035,000 and not $1,070,000 because they received half your basis when you added them as a joint tenant. Based on when they sell it and how much other income your child receives, they will owe a least a couple thousand dollars in taxes from the sale of your house.
Conclusion
If your goal is to avoid taxes, if you are a U.S. Citizen and resident of Florida, you shouldn’t have to worry unless your estate is worth more than the Basic Exclusion Amount, which in 2025, is $13.99 million. Having a Will or a Living Trust won’t affect your estate tax liability because you still own or control the assets. But inheriting, which you can do with a Will or a Living Trust, is better than gifting to your beneficiaries during your lifetime if you want to avoid capital gains taxes.
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