Thanks to today's favorable federal gift and estate tax rules, most people haven't amassed enough wealth to worry about federal estate taxes. However, even if you haven't had the good fortune to win the lotto or inherit millions from a wealthy relative, you still need an estate plan to protect your assets and your loved ones. Here are some critical estate planning issues to consider.
There are several reasons why you should put together a written will:
The guardian's job is to take care of your kids until they reach adulthood (age 18 or 21 in most states). The executor's job is to pay your estate's bills, pay any taxes due, and deliver what's left to your intended heirs and charitable beneficiaries.
If you have significant assets, you should probably set up a living trust to avoid probate. Probate is a court-supervised legal process intended to make sure a deceased person's assets are properly distributed. However, going through probate typically involves administrative red tape and legal fees — plus your financial affairs will become public information.
If you establish a living trust, you can transfer legal ownership of designated assets to the trust. The transferred assets won't go through the probate process. Examples of assets you might want to consider transferring to a living trust include:
The trust documents name a trustee to be in charge of the trust's assets after you die and specify which beneficiaries will get which assets from the trust. While you're alive, you can function as the trustee — or you can designate your attorney, CPA, financial institution or a loved one to be the trustee. After you die, the trustee that you've named in the trust documents will take over.
Because a living trust is revocable, you can change its terms at any time or even unwind it while you're alive and legally competent. It's called a living trust because it's effectively "alive" as long as you are. Other common names for living trusts are family trusts, grantor trusts and revocable trusts.
For federal income tax purposes, your living trust is a "revocable grantor trust," so it's ignored while you're alive. As such, you're still considered to personally own the assets that are in the trust as far as the IRS is concerned. That means you'll continue reporting on your federal tax return income generated by trust assets and deductions related to those assets, such as mortgage interest on your home.
For state-law purposes, the living trust is not ignored. Done properly, it achieves the estate planning goal of avoiding probate.
When you die, the assets in the living trust are included in your estate for federal estate tax purposes. However, assets that go to your surviving spouse aren't included in your estate for tax purposes — assuming your spouse is a U.S. citizen — thanks to the unlimited marital deduction privilege.
If you're married, your living trust can cover both you and your spouse. Typically, the trust will maintain grantor trust status while your spouse remains alive. Your surviving spouse will be considered to personally own the assets that are in the trust as far as the IRS is concerned. So, your spouse will report on his or her tax return income generated by trust assets and deductions related to those assets.
The trust becomes irrevocable after the grantor dies (or both spouses die if both spouses are the grantors). At that point, it falls under the trust income tax rules, and the trustee will need to do some planning to get the best tax results. Usually that will involve distributing trust income and gains to the trust beneficiaries and winding up the trust by distributing its assets to the beneficiaries.
Wills and living trusts offer meaningful benefits, but you should mind the details to achieve the expected advantages. Consider the following tips:
Important: Some states have death tax exemptions that are far below the $12.92 million federal estate tax exemption. So, you could be exposed to state death taxes even though you're fully exempt from the federal estate tax.
Federal and state estate and death tax rules have proven to be unpredictable. Plus, personal circumstances may change. You might acquire new assets, win the lottery, lose relatives to death, disown relatives (or take them back) and gain children or grandchildren. Any of these events — and changes to tax laws — could require estate plan revisions. So, it's important to review your estate plan at least annually and update as needed. Contact your estate planning advisor for assistance.
Most people aren't currently exposed to the federal estate tax, thanks to today's generous $12.92 million exemption (effectively $25.84 million for a married couple). However, that's not the end of the estate planning story.
If you have minor children and some assets — such as a home, a car and some possessions — you still need an estate plan. Why? If you die "intestate" (meaning without a will), the laws of your state determine the fate of your minor children and your assets. A written will clarifies your wishes, and a living trust simplifies matters for your loved ones. Do-it-yourself estate planning documents can be perilous, so always work with an estate planning attorney to make sure you've covered all the bases.
Get in touch today and find out how we can help you meet your objectives.