Forces That Affect Your Estate Plan
From probate and ownership division to the taxing arm of Uncle Sam, here are four things that can influence what happens to your belongings.
- (opens in new tab)
- (opens in new tab)
- (opens in new tab)
- Newsletter sign up Newsletter
Everything you own is considered part of your estate when you die. To grasp the importance of planning for the distribution of your worldly goods, consider all the things that influence what happens to them.
1. The role of probate
This is the procedure by which state courts validate a will's authenticity, thereby clearing the way for the executor to collect and pay debts, pay taxes, sell property, distribute funds and carry out other necessary tasks involved with settling an estate. The process can be slow and expensive, and probate fees can absorb 3% to 7% of the estate's assets. And if there is a "will contest," costs will skyrocket.
Mindful of criticism and the spread of devices designed expressly to keep assets out of the grip of probate courts, most states have adopted a streamlined procedure for small estates, with informal procedures requiring little court supervision. Sometimes all that's necessary is for the appropriate person to file an affidavit with the court and have relevant records, such as title to property, changed. Formal probate, in which major steps along the way are supervised by the court, is commonly reserved for large estates.
Subscribe to Kiplinger’s Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Not all of your estate has to go through probate. Among the items exempted from probate -- but not necessarily from taxes -- are life insurance payable to a named beneficiary, property left in certain kinds of trusts and assets such as homes and bank accounts held in joint tenancy with right of survivorship.
2. Joint ownership
Property jointly owned with a right of survivorship -- the form that is commonly used by married couples but can be employed by any two people -- automatically passes to the other owner when one owner dies. Tenancy by the entirety, another form of joint ownership, can apply only to married couples and isn't recognized in all states. The pluses and minuses of joint ownership are discussed in detail later. For now, suffice it to say that it is an important estate-planning tool.
3. Federal estate and gift taxes
Despite all the attention given to the federal estate tax, few estates ever actually owe it. For 2016, the first $5.49 million of an estate is tax-free (twice that for married couples), so only taxable estates larger than that have to pay the tax -- the top rate is 40%.
If your estate is likely to approach or surpass the taxable level, one way to reduce the estate-tax hit is to give away assets before you die. You can give away up to $14,000 a year to as many recipients as you wish without reducing your lifetime exemption. (For married couples, the limit is $28,000 per recipient.)
4. State inheritance taxes
Until 2005, all 50 states and the District of Columbia had an estate tax, too: a so-called pickup tax, which applied only to estates owing the federal tax. The pickup tax didn’t actually increase the amount an estate owed but simply used a tax credit to channel revenue to your state rather than to the federal treasury. In 2005, though, the federal credit disappeared and so did the state’s pickup tax. Currently, the District of Columbia and 14 states (Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, Rhode Island, Vermont and Washington) collect an estate tax. Delaware and Hawaii peg their exemption to the federal level.
Six states — Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania — levy an inheritance tax, which is paid by the beneficiary rather than the estate. (And, yes, that means both Maryland and New Jersey collect both an estate tax and an inheritance tax). In all states, transfers of assets to a spouse are exempt from the tax. In some states, transfers to children and close relatives are also exempt.
Tired of Scam Text Messages? The FCC Cracks Down
New scam text message rules from the FCC require carriers to block texts from bad numbers and protect consumers.
By Ben Demers • Published
Four Steps for Teens Who Want to Test the Investing Waters
Teens who feel ready to try their hand at investing should first get educated, with adult supervision, and then it’s all about diversify, diversify, diversify.
By Kerim Derhalli • Published
What to Do With Money in a Former Employer’s 401(k)
Basics Leave it behind, move it to your new job’s plan, or roll it over to an IRA. Each of the options has pros and cons.
By Emma Patch • Published
The FIRE Movement Is Alive and Well
Basics The pandemic didn’t derail the Financial Independence, Retire Early movement. In fact, it gave it new life.
By Lisa Gerstner • Published
How to Apply for a Social Security Card Replacement
Basics Applying for a Social Security replacement card, especially online, can be fairly straightforward. You just need the right documentation on hand.
By Jackie Stewart • Published
Traditional IRA Basics: 10 Things You Must Know
Basics A traditional IRA can be a powerful retirement-savings tool but you need to understand contribution limits, RMDs, rules for beneficiaries under the SECURE Act and more.
By Jackie Stewart • Last updated
A Retiree’s Guide to Key Dates in 2021
Basics It's critical -- and financially sound -- to hit these important financial deadlines spaced throughout the year.
By Catherine Siskos • Published
A Memoir to Record Your Life Story
Basics Engaging with a company that will write your life story could be a lasting gift to yourself or a family member.
By Alina Tugend • Published
Social Security Basics: 12 Things You Must Know About Claiming and Maximizing Your Social Security Benefits
Basics Claiming Social Security benefits at the right time means more money in your pocket. Here’s a guide to everything from knowing your full retirement age to taking Social Security spousal benefits.
By Sandra Block • Last updated
How Snowbirds Can Establish Residency in Florida for Tax Purposes
retirement Snowbirds in the Sunshine State who want to avoid state income taxes in retirement must satisfy the Florida residency requirements.
By Rocky Mengle • Last updated