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.
In my prior articles, we have discussed estate tax and estate tax exclusions. Be sure to understand those point when it comes to your making plans for estate conservation. Of course, know the obstacles I shared about attorneys, too. Now, in this article, we are discussing “death taxes” as one of the obstacles that stand in the way of transferring your estate to your heirs.
In this post I will conclude the discussion of the Federal Estate Tax, present a few thoughts about state-level taxes that may be imposed as a result of your death, and introduce the challenge of probate. My last points concerning the Federal Estate Tax are about an advantage and about a caution.
The advantage regarding death taxes
The advantage is marriage. A married couple can combine the Marital Exclusion with the Exemption Exclusion and thus double the current Exemption Exclusion. Each spouse receives the (current) $11.4 million Exemption Exclusion, so a married couple can exclude up to $22.8 million from the Federal Estate Tax.
This concept is called “portability” and is very easy to incorporate into estate planning for most families. It is included in the statutes and provided automatically, but my recommendation is to specifically include it in your estate planning. The reason is that this statutory portability, like many other of the features of the recent tax legislation, has a sunset. And that leads to my caution.
The caution for your estate planning regarding death taxes
The caution is expiration. Sunset is just a politically softer word for expiration. Many of the key benefits of the changes to the tax laws affecting your death will sunset, or expire, on December 31, 2025. It is certainly possible that congress and the president will move to extend those benefits, but that is not something that can be relied upon. In today’s deeply-divided political climate, the inability to reach an agreement is easy to envision. At the end of 2025, the lack of any affirmative extension will mean the laws automatically revert to their 2018 status.
This is true for portability and also for the $11.4 million Exemption Exclusion amount.
Smart estate planning will work with this deadline in mind and develop a strategy to take advantage of the next 5-1/2 years.
State-level death taxes
And now, a word or two about state-level death taxes.
In this area, the news is generally good. Indiana and many other states have repealed or otherwise reduced or eliminated their estate and inheritance taxes. I believe the competition among the states for high-net-worth residents has fueled this trend, and for that reason I believe the benefits will endure despite political changes in any given state.
Also, when contemplating state tax burdens, be sure to consider any gift taxes and any capital gains taxes, as both can affect your estate planning.
My bottom-line comment concerning the obstacle of death taxes as it may affect your estate planning is this: Realize that there may be competing goal of tax savings and control of distribution. It may be possible to creatively achieve the goals in both arenas, but you should be prepared to prioritize your goals.
The challenge of probate
Moving on from taxes, we will spend the balance of this series exploring the challenge of probate. The starting point is simply to understand what probate means.
In a basic sense, probate is the legal process of transferring a deceased person’s assets to new owners. A simple example would be a person who dies owning their home. The home will be transferred to heirs or new owners, but who can sign the deed if the owner is deceased? Probate is the court procedure to authorize such transfers.
The problem with probate is that it is expensive, time-consuming, and public. In order to understand what impact probate may have on your estate, it is first important to understand that probate does not affect all your assets.
To start the analysis, simply make three columns on a sheet of paper. In the first column, list all the assets that you own jointly with your spouse or another person. In the second column list all the assets on which you have designated a beneficiary – things like life insurance, IRAs, and 401(k)s. Lastly, in the third column, list all the assets which you own only in your name.
Once you have this breakdown complete, we can analyze your estate and come with up some general guidelines to help you with your estate plan. And that is what we will do in our next post. In the meantime, don’t hesitate to contact me with questions or concerns you might have regarding estate planning.
Troy