Many people think estate planning is only for the affluent. But anyone with a positive net worth or children who are minors should think about what will happen when he or she dies.

Planning Made Easy

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)
  • 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 $5.34 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 to make it harder for anyone to challenge your estate. Without a living trust, your estate becomes part of the public record.

Regardless of the value of your assets, you likely do not want your finances made public, so timely follow-through is crucial to effective estate planning. After establishing a living trust, change the titles of all assets you want to transfer to it. In addition, a living trust can be used to manage assets in the event you become incapacitated.

More Affluent Individuals

In 2014, if your estate is worth more than $5.34 million (or $10.68 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. For 2014, 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 top threshold value? Should you give away assets today? Or should you 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 federal gift tax exemption, so the transfer incurs no federal taxes. Also 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. In this situation, you may want to consider selling assets with losses before you die.

Summary

Estate planning is an ongoing process with many options and nuances. Changes in estate tax law in the future can alter the current exemptions and tax rates—or even repeal the estate tax altogether. As a result, it is important to be prepared for a variety of scenarios and always consult with a professional advisor.

 

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The information contained in the Knowledge Center is intended solely to provide general guidance on matters of interest for the personal use of the reader, who accepts full responsibility for its use. In no event will CST or its partners, employees or agents, be liable to you or anyone else for any decision made or action taken in reliance on the information in this Knowledge Center or for any consequential, special or similar damages, even if advised of the possibility of such damages.