Estate Planning – Not Just For The Rich and Famous

Less than 1 percent of those who die in the U.S. will owe federal estate taxes in 2013, according to the Tax Policy Center, a nonprofit organization.

Many people think estate planning is only for the most affluent folks. But everyone with a positive net worth or minor children should think about what will happen when he or she dies.

More than Taxes

Small, simple estates typically require minimal time and money to square away. Estate plans should include:

  • Written wills or living trust arrangements;
  • Guardians for minor children;
  • Evaluations of retirement savings and life insurance products and coverage;
  • Appointments of executors and trustees (if applicable); and
  • Designations of beneficiaries for life insurance, pensions, and retirement accounts.

Proactive estate planning requires updating, especially if life situations change due to births, adoptions, deaths, marriages or divorces.

Even if your estate isn’t large enough to incur a federal estate tax bill, you might incur estate or inheritance taxes at the state level, because some states’ exemptions are lower than the $5.25 million federal exemption.

You also might want to set up a living (or revocable) trust for your assets to keep the details of your estate out of probate — and make it harder for anyone to challenge your estate. Without a living trust, your estate becomes part of the public record.

Rich or middle class, you may not want your finances made public, so timely follow-through is crucial to effective estate planning. After setting up a living trust, change the titles of all assets you want to transfer to it. Another benefit: A living trust can be used to manage assets in the event you become incapacitated.

More Affluent Individuals

If your estate is worth more than $5.25 million (or $10.5 million when combined with your spouse’s estate), consider making gifts that will use up some or all of your unified federal gift and estate tax exemption. That way, future appreciation in the value of assets you give away won’t be included in your taxable estate.

If your assets are sold later, the gift recipient will incur capital gains tax on the appreciated value. But capital gains tax rates have historically been below estate tax rates. In 2013, the top federal capital gains tax rate (20 percent) is half the federal estate tax rate (40 percent).

But what if your estate’s value hovers near the $5.25 million threshold (or $10.5 million for married couples)? Should you give away assets today — or wait? The answer depends on your age, health, expected tax law changes, projected future value of assets, and other factors.

To illustrate, suppose you gift a $2 million vacation home to a daughter today. Assume it’s your first “dip” into your $5.25 million federal gift tax exemption, so the transfer incurs no federal taxes. Assume that upon transfer, your daughter’s tax basis in the house is $1 million. In ten years, your daughter sells the property for $3 million. She will owe capital gains tax on the $2 million difference between the sale price and the tax basis in the property.

Conversely, let’s suppose you had willed the house to your daughter. She would receive a stepped-up basis in the house for income tax purposes at the time of your death. Therefore, her tax basis in the house would be $3 million — and she could sell it for $3 million without incurring any federal capital gains tax.

Assets with Losses

Most assets appreciate over time, but if you own assets with losses, your estate could lose out on claiming them. That’s because your heirs would receive the assets at a stepped-down basis, due to the market value on the date of death. So, consider selling assets with losses before you die.

© Copyright 2013. All rights reserved.
Brought to you by: Gordon Advisors, P.C.

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