retirement

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.

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.

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.

Most Popular

Who Should Return Their Third Stimulus Check to the IRS?
Coronavirus and Your Money

Who Should Return Their Third Stimulus Check to the IRS?

Some people who receive a third stimulus check are required to send it back to the IRS. Others can return it voluntarily.
April 12, 2021
Where's My Stimulus Check? Use the IRS's "Get My Payment" Tool to Get an Answer
Coronavirus and Your Money

Where's My Stimulus Check? Use the IRS's "Get My Payment" Tool to Get an Answer

The IRS has an online tool that lets you track the status of your third stimulus check.
April 4, 2021
11 Good Reasons to Cancel Amazon Prime
Budgeting

11 Good Reasons to Cancel Amazon Prime

You probably aren't using most of the perks tucked into that $119 annual fee -- which you don't need to pay to get the free Amazon shipping you crave.
April 13, 2021

Recommended

Getting the Best of Both Worlds from an Irrevocable Trust
estate planning

Getting the Best of Both Worlds from an Irrevocable Trust

Irrevocable trusts open the door to important tax strategies, but they mean the loss of control of the assets held in the trust … or do they? Today’s …
April 5, 2021
Kids Not Ready for Their Inheritance? Consider a Private Foundation
estate planning

Kids Not Ready for Their Inheritance? Consider a Private Foundation

The benefits of starting your own foundation extend far beyond tax savings: It can help preserve your family’s wealth and unity.
April 4, 2021
Time to Face Reality: Your Kids Don’t Want Your Stuff!
estate planning

Time to Face Reality: Your Kids Don’t Want Your Stuff!

One estate planning mistake I see all the time is that parents want their children to inherit their homes and treasured possessions, and they assume t…
March 29, 2021
Do I Need a Family Office? A Guide for the Rich and Not So Famous
estate planning

Do I Need a Family Office? A Guide for the Rich and Not So Famous

Ultra-wealthy people, including Bill Gates, have family offices, but so do about 10,000 others. What is a family office, and is it right for you? Get …
March 24, 2021