Estate Planning – How, When and Why? Part 2


Begin your estate planning process by meeting with your attorney and your CPA.

As covered in our previous post, estate planning is not limited to the wealthy or elderly. Almost everyone has an estate, regardless of net worth. Drafting a will allows you to establish who will inherit your property after your death, and ensures your wishes will be respected during your lifetime. Carefully executed estate planning also allows you to maximize the value of the inheritance you leave to your beneficiaries. 

Optimizing tax protections
Much has changed in estate planning in the last decade. Previous iterations of the federal estate tax law made it advisable to gradually diminish your estate toward the end of your life, so as to pass assets on to your loved ones while reducing the impact of gift and estate taxes.

However, beginning in 2015, Congress set the basic exclusion level for federal transfer taxes, including estate and gift taxes, at $5.43 million. While gift taxes include any property or assets bequeathed during the estate holder's lifetime, estate taxes cover any assets or property passed on after the estate holder's death. Under the current federal tax laws, any inherited or gifted assets valued beneath the basic exclusion will not be subject to federal tax.

"Holding on to assets until death effectively nullifies the capital-gains tax."

While the majority of estates are covered by the basic exclusion, these changes still have bearing on any estates that include assets or property that have appreciated, such as land or stocks. For example, if you bought a piece of property for $25,000 that is now valued at $125,000, selling this property during your lifetime would mean owing federal capital-gains tax on the $100,000 profit, a tax that may carry a rate as high as 23.8 percent. Additionally, if you and your spouse have a combined adjusted gross income that exceeds $250,000 (or $200,000 for a single individual), you will pay an additional 3.8 percent surtax.

However, holding on to assets until death effectively nullifies the capital-gains tax. Your beneficiary will inherit the asset at market value and will likely be protected from federal estate tax by the basic exclusion amount. Additionally, if your estate uses less than the $5.43 million exclusion, the remainder may carry over and be combined with your spouse's exclusion. For example, if your estate totals $2 million, the remaining $3.43 million would bring your spouse's total estate exclusion to $8.86 million. This transfer of estate tax exclusion is called portability and is only applicable to surviving spouses. A federal estate tax return must be filed to make this election.

That said, your state may have relevant taxes that will have bearing on your estate. Nineteen states and the District of Columbia have death taxes, inheritance taxes or both. It's important to consult with your certified public accountant to become familiar with applicable state taxes.

When to begin planning your estate
Even if you recognize the value of estate planning, you might think it's too early to begin the process. However, if you own any assets of value, from real estate to valuable items such as jewelry, if you have children or if you own a business, it's time to think about your estate. In truth, it's never too early to begin the estate planning process. Once created, this process will change as your life changes. The most important step in this process is to get started.

"It's never too early to begin the estate planning process."

Because of the range of assets involved, you should meet with both your attorney and your CPA to discuss questions pertaining to your will and estate. Meeting with both experts at the same time can expedite the process and ensure all your questions will be answered in one setting.

For more information on estate planning, please contact a LaPorte tax services professional.

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