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Estate planning involves more than just distributing assets—it requires careful attention to income tax implications at every stage. Decisions made during life and after death can significantly impact taxes for you, your spouse, your estate, and your beneficiaries.
If you own a pass-through business (such as an S corporation, partnership, or LLC), the tax treatment of business income after transfer depends on whether it's classified as active, passive, or portfolio income. Active income is typically taxed more favorably, potentially qualifying for lower rates or loss deductions. However, determining active vs. passive income for a trust or estate is more complex than for individuals. Courts have ruled that participation is based on the fiduciary's (or their agent's) involvement in the business. Since IRS guidance is limited, proper trustee or executor selection is crucial to preserving favorable tax treatment.
