30th Oct 2014

Making plans for your estate is one of the most helpful things you can do for your loved ones to prepare for a disability or death.  Having a plan in place to take care of your financial and medical affairs provides your family with a blueprint of how you want things handled.  Planning well and having the correct documentation ready can help your family avoid probate court, excessive taxes and know to whom your property should go in the event of your passing.  It also gives you the ability to ensure that the best person for handling your affairs will be appointed to do so.

There is a $5 million exemption from federal tax on estates left to a child or spouse.  This means that, when leaving your estate to your spouse or child, if it is worth less than $5 million, no federal taxes will be levied against it.  This means that you can focus your energy on planning your estate without worry that it will be adversely affected by high federal taxes.  Your estate can be planned to manage wealth, and maintain it, for your spouse or children.  This has changed the trends in estate planning from avoiding excessive taxes to more practical concerns.

Getting Back to Basics

This trend can best be explained with a single word: simplify.  In 2013, the generation-skipping, gift and estate tax breaks covered estates up to $5 million (inflation-adjusted, that’s $5.25 million).  The top rate increased from 35% to 40% in 2013.  The portability election for estate taxes was made permanent, as well.  This portability election lets you use any unused estate tax exemption amount left by your deceased spouse, and is responsible for much of the trend toward simplification in estate planning. 

While some people will want to cling to the old way that estate planning used to be done, before the tax laws changed, the overall trend is making estate planning simpler.  You can plan your estate in a transparent and understandable way; you no longer need complex financial tools to ensure your estate goes where you intend it to go, instead of into government coffers.  There are also techniques which can be employed after you pass which allow your family or advisor to look over your estate before turning in your final tax return.  These techniques will allow them to correct mistakes, as well as account for any changes which have taken place in the law since your estate was planned.

Planning Your Estate with State Tax in Mind

Since the laws regarding federal estate tax have become so favorable, it’s important to ensure you’re planning your estate with an eye toward state taxes.  Some states have very low exemptions, as little as $1 million and state estate taxes can be as high as 16%.  Protecting your estate from excessive state estate tax is very important in maintaining and managing wealth for your heirs.

State estate tax may seem like a relatively easy concept to understand, but it becomes exponentially more complicated when you own various properties in more than one state.  Your estate will be subject to the tax laws where you live, but other states may tax your property in those states.  This may not seem like a problem, but often, those other states can assess state estate tax on more than just the property located within their borders.  The state may be able to assess estate taxes on intangible assets, too, regardless of where they are based or where you live.  This may translate to tax on investments or stocks held in your family business.  This occurs because the domicile determination for the purposes of assessing state estate tax is different from the domicile determination for the purposes of assessing state income tax.  It is especially important that attention is paid to this point, in order to shield your estate from undue taxation.

Intergenerational Focus

Because more wealth can now be transferred to the next generation with less interference from the federal government, it’s becoming more important to focus on building and maintaining wealth across a number of generations.  Before the laws became more favorable, it made sense to focus on wealth preservation while diminishing federal tax obligations.  Now, however, it’s becoming more important to focus on capturing, preserving and managing family assets so as to benefit the coming generations as much as possible.  You’ll want to have a serious and open discussion about goals for your estate which will provide benefits for the whole family unit in the future.

Dynasty Trust Investments

If you’re going to take advantage of gifting over $5 million by putting it into a trust, it’s important that the trust have an investment plan focused on helping that money grow.  This exemption is now permanent, so you may be interested in continuing to implement these types of trusts.  One of the most positive things about the law as it now stands is that the assets therein will not be subject to estate tax for future generations; this is true until the trust actually terminates.  No matter how much the trust assets grow, they won’t be subject to estate taxes.  Your advisor should look at investment leverage and understand how to invest so that those assets grow appropriately.  Life insurance could also play a part in your strategy for investment and may be used as additional leverage, especially since monies used in purchasing life insurance have likely already been removed from the federal tax system.

Double Inheritors

If you’re a woman of the Baby Boomer generation, you stand to become a double inheritor, meaning that you will inherit wealth from your parents and your spouse.  This means that you may have more of an inheritance than you ever thought you might.  It’s important to understand what resources are available to you for education on estate planning.  Your advisor may offer workshops which will help inform you about the basic aspects of planning your estate.

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