Estate Planning 101

Estate is a rather grand word when you consider than most everyone, including a minor, has some form of an estate that can be passed on to someone at the time of their death. Anyone who has something of value that they hold in their own name has an estate that can be bequeathed or otherwise transferred to someone else upon death. The law has already taken this fact into account and has set up a process by which the estate of someone who does not have a will can be processed (intestacy). The downside is that the law decides who receives your estate based solely on proven relations, no matter how distant. If you want to plan how your estate will be distributed, here’s what you need to consider and know.

In addition to dictating the disposition of assets upon death, a good estate plan should also address the accumulation and conservation of the assets of the estate, thus helping to maintain and increase the financial security of the estate owner and beneficiaries. At a bare minimum, your estate planning education should cover the broad topics of wills, trusts, estate taxes, the prevailing law of the moment, gift taxes, and state death taxes, if any.

Wills: While the Florida has a free and relatively easy to use system for processing estates – also known as intestacy laws – most people when estate planning will elect to go the route of drafting a will setting forth very precisely how they wish to have their estate distributed upon their death. The benefit of a will, rather than leaving it all to intestacy laws, is that you get to drive the train in just about every aspect possible. Using a will to distribute your estate allows you to choose the executor, designate who will take care of any minor children (or pets), give all or some of the estate to charities of your choice, distribute specific bequests to specific relatives or friends, and minimize estate taxes.

For some, the burden of having to choose what do with their assets is almost insurmountable, and they choose to die without a will to avoid having to make the harder choices. Among the numerous problems with this approach is that state intestacy laws are usually very specific and rigid as to how assets will be distributed, and will almost certainly give the bulk of the estate to relatives, no matter how distant, as long as they are living and can be located.

Trusts: There are several different kinds of trusts and each serves its own unique purpose. Most trusts, however, are instituted for purposes of safeguarding assets and avoiding, to the greatest extent possible, tax liability both during the life of the creator of the trust and after their death. Living trusts, also known as inter vivos trusts, are created when the individual is still alive to put the assets in a separate entity with varying degrees of availability to the beneficiaries depending upon whether they are revocable or irrevocable.

The most common reasons for creating trusts are to place valuable assets in an entity separate from the owner for purposes of managing and conserving the assets, minimizing tax liability particularly after death, bypass probate by allowing property to be distributed directly to beneficiaries at death, and to place conditions on how the monies are spent to avoid squandering by spendthrift beneficiaries.

Estate Taxes: The overarching theme and driver of many estate planning tools is the desire and attempt to minimize, if at all possible, the tax burden at the time of death of the grantor. While federal estate taxes do not apply unless the estate is valued over $5.49 million, as adjusted for inflation, the reality is that more estates get caught in this web than would meet the eye. This is because the definition of assets for purposes of the estate tax is much broader than most would anticipate. It includes life insurance policy payouts and other benefits including 401K plans that pass upon death. The key is whether or not there is a “value passing to others as a result” of the death. Thus, pension and retirement plan funds are also possible culprits in bumping an estate into federal estate tax eligibility.

The current law of estate taxes. Estate tax law is ever evolving, but the concept of a certain amount of property being allowed to pass from the deceased to heirs without being taxed remains. This amount is known as the basic exclusion amount and while it is required to increase under the Economic Growth and Tax Relief Reconciliation Act of 2001, that amount has been set as of the American Taxpayer Relief Act of 2012 at $5.49 million for 2017. The ATRA also gave some relief to living spouses of deceased individuals by allowing them to carry over the left over and unused exclusion amount to their own estate. If a deceased individual used only $1 million of the basic exclusion amount, their spouse would be granted a basic exclusion amount of $10.4 million.

Gift taxes: No good deed goes unpunished, but at least in the tax world, some good deeds do in fact get to be just good deeds. While the giver of a monetary or valuable gift must pay taxes on that gift, the annual gift exclusion allows the giver of the gift to make gifts up to $14,000 to as many people as they choose before having to declare or pay taxes on those gifts ever. If you are married, you and your spouse can “gift-split” and give up to $28,000 to any individuals, again tax free. In this respect, you can make gifts during your lifetime without incurring any taxes whatsoever and thereby whittling down the value of your estate to further limit tax liability at death.

State Death Taxes. Death and taxes are a certainty and it is a certainty that whatever state your will is probated in will probably want a piece of the action. The key here is to know exactly what your state allows ahead of time. Some states have no death tax, others allow for exemptions for bequests to relatives, and others simply assess a tax and that is it. Either way, it is important to understand your options when planning how to distribute your estate to ensure that when the time comes, no one is left holding the bag.

It is never too early to start planning your estate and its distribution. Far from being a maudlin exercise, it is a vitally important step to understanding your assets and goals and making those goals a reality. We do not know what the future may bring, but at the very least, you can plan for it. I strongly encourage all of my clients to engage in some form of estate planning no matter their position and time in life. It’s never too early and it’s never too late to call me at (305) 921-0440 or email me at [email protected] to get started.

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