Common sense applies:Just because I post this, and you read it, does not make me your attorney and does not make you my client. Every situation is unique, and you should always consult an attorney when creating legal documents.
Some big obstacles to confront for your plans for estate conservation in terms of planning include attorneys, taxes, and probate. Having examined the obstacle of attorneys we will now spend a few posts discussing the obstacle of taxes, then move on to look at the obstacle of probate.
Death taxes
We will begin in this blog article by examining generally the challenge of taxes, specifically what are known as death taxes. Death taxes, generally, come in the form of the federal estate tax and your state’s inheritance or estate tax. In the not too distant past, it was a scenario of taxing you to death, then taxing your death.
But big changes have come to pass in the last decade, and all in your favor.
When you pass away in the United States, you may leave your assets on your terms to whomever you want. There are some limitations and restrictions on this freedom. But, all in all, it is a great liberty and privilege of our system of governance.
But this privilege is also subject to taxation. The taxes applying to your estate are considered “transfer taxes.” This is because they are a tax on the transfer of your assets upon your death. The U.S. government has a Federal Estate Tax. In addition, some states impose their own taxes, either as estate taxes or inheritance taxes.
These transfer taxes are different from income taxes and capital gains taxes. They are politically unfavorable in today’s world. That has led to the changes.
Federal Estate Tax
We will start with the Federal Estate Tax. It is important to understand the Federal Estate Tax has become a substantial political football in the past twenty years. The general movement has been to raise the threshold so that the federal estate tax applies only to large estates. For many years the threshold was set at $5 million and was indexed (increased) annually to account for inflation. Part of the tax reform passed by Congress and signed by President Trump doubled that threshold to $10 million. The 2019 threshold, adjusted for inflation, is $11.4 million.
As a result, only estates that have a value greater than $11.4 million will be subject to the federal estate tax. That effectively eliminates this tax for most people. It allows the heirs to receive more of their loved one’s estate.
This is good news, but remember that these changes do not repeal the federal estate tax. Future legislatures and presidents can reverse or otherwise amend the tax threshold to levels that will include smaller estates.
With that in mind, it is important to have some understanding of the federal estate tax. This is true even if your estate is not going to exceed the current threshold.
What is included in the estate tax?
We start with the question, “What is included for taxation?”
Simply put, everything you own when you die is considered for taxation.The value of some of these items is determined in a very straightforward manner. The fair market value of your home is calculated and included. The balance in your bank accounts and the value of your investment portfolio are included.
Other items are more complicated and slightly sinister. Your life insurance policy with a $250,000 benefit and a present cash surrender value of $80,000 is included at the benefit amount of $250,000. This is even though it is not money you will ever receive and enjoy.
The value of your business is included. It is this valuation that is the subject of argument and costly appraisals.
As an aid, you can typically use a three-column list you develop for probate planning. Each category of asset (individual, joint, contractual) will be included at full value for consideration of the Federal Estate Tax.
Everything you own is included for examination. Yes, your estate is probably more complex than you think. Contact me for more information and answers to questions you have.
Next up, what can be properly excluded?
Troy